Macroeconomics Chapter 17-Money Growth and Inflation

The resources wasted when inflation encourages people to reduce their money holdings is called:

shoeleather costs.

The velocity of money is:

the rate at which money changes hands.

What are the 6 costs of inflation?

1.Shoeleather costs associated with reduced money holdings 2.Menu costs associated with more frequent adjustment of prices. 3. Increased variability of relative prices 4.Unintended changes in tax liabilities due to nonindexation of the tax code. 5.Confusion and inconvenienced resulting from a changing unit of account. 6.Arbitary redistributions of wealth between debtors and creditors.

How does an increase in the price level affect the real value of money?

A rise in the price level means a lower value of money because each dollar in your wallet now buys a smaller quantity of goods and services. When the overall price level rises, the value of money falls.

According to the quantity theory of money, what is the effect of an increase in the quantity of money?

An increase in the money supply makes dollars more plentiful, the result is an increase in the price level that makes each dollar less valuable.

How can the government pay for some of its spending?

By printing money.

The one-for-one adjustment of the nominal interest rate to the inflation rate is called the ________ effect.

Fisher

What is hyperinflation?

High inflation

What happens when central bank increases the supply of money?

It cause the price level to rise.

What is one application of the principle of monetary neutrality and what does it do?

One application is the Fisher effect. When the inflation rate rises, the nominal interest rate rises by the same amount so that the real interest rate remains the same.

What happens when the Fed adds more money to the economy?

The Money Supply curve shifts to the right, causing the equilibrium price level to increase.

What is Money Demand?

The amounts of money people are willing to hold at different price levels.

What is the quantity theory of money?

The quantity of money available in an economy determines the value of money, and the growth in the quantity of money is the primary cause of inflation.

When there is inflation...?

The value of money decreases in the economy.

What do most economists believe about monetary neutrality?

They believe that this approximately describes the behavior of the economy in the long run.

Why do people believe that inflation makes them poorer? Why is it a fallacy?

They believe this because it raises the cost of what they buy. This is a fallacy because inflation also raises nominal incomes.

What is the principle of monetary neutrality

This asserts that changed in the quantity of money influences nominal variables but not real variables.

What happens when there is a persistent growth in the quantity of money supplied?

This leads to continuing inflation.

What happens when countries rely heavily on inflation tax?

This results in hyperinflation.

Why do the overall level of prices adjust?

To bring money supply and money demand into balance.

What is a nominal variable?

Variables measured in monetary units

What is a real variable?

Variables measured in real units.

When inflation turns out to be higher than expected, borrowers will be ________ off, and lenders will be ________ off.

better, worse

According to the principle of monetary neutrality:

changes in the money supply do not affect real variables.

According to the Classical Dichotomy:

nominal variables are expressed in monetary units and real variables are expressed in physical units.