MacroEconomics Chapter 17 Notes

The value of money is determined by..

by the supply and demand for money

Hyperinflation

is extraordinary high inflation

quantity theory of money

The quantity of money in the economy determines the price level (and the value of money), and an increase in the money supply increases the price level, which means that growth in the money supply causes inflation.

Real variables are measured in

in physical units. Any price or wage stated in terms of goods is a real variable. For example, in 2012, the relative price of a mandarin is 0.22 magazines

What causes inflation?

inflation is caused when the government prints too much money

immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is

less than the quantity of money demanded at the initial equilibrium. The reduction in the supply of money causes the demand for goods and services to fall but does not impact the economy's long-run productive capacity. In the long run, the reduction in demand leads to lower prices for products, with no change in the number of products produced. As a result, one dollar will buy more goods and services than before the monetary contraction—in other words, the value of money rises.

Nominal variables are measured in

monetary units. Any price or wage denominated in money, such as Rina's $18.00 per hour wage, is an example of a nominal variable.

classical dichotomy suggest..

suggest that economic variables can be divided into two variables 1) nominal variables (measured in monetary units) 2) real variables (measured in phsycical units)

When the value of money is high, the price level is low and the quantity of money demanded is..

the Q.O.M. demanded is low

Inflation

an increase in the overall level of prices in the economy

By selling bonds, the Fed exchanges ...

bonds for money from the public, thereby reducing the amount of money in circulation.

In order to increase the money supply, the Fed uses open market operations to

buy bonds from the public. By buying bonds, the Fed takes bonds from the public and replaces them with money, thereby increasing the amount of money in circulation. The new money supply curve is a vertical line at $4 billion.

Deflation

decrease

inflation tax

the impact of the government's decision to raise revenue by printing money on the value of money is known as the

When prices rise it is because..

the money used to buy them are less valuable

Monetary neutrality is

the proposition that a change in the money supplyaffects nominal variables and does not affect real variables.

In order to reduce the money supply, the Fed uses open market operations to

to sell bonds to the public. By selling bonds, the Fed exchanges bonds for money from the public, thereby reducing the amount of money in circulation.