macro ch5

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percent of gov. revenue that is seigniorage

(inflation rate x currency)/gov revenue

Money earns an expected real return of

-Epi

V=

1/k

money demand function

(M/P)^d=L(i,Y)

determines real GDP

the productive capability of the economy

determines nominal GDP

the quantity of money

The ratio of the dollar value of all transactions to the money supply.

transactions velocity of money, V

Suppose that the Federal Reserve announces a higher money supply in the future but does not change the money supply today. This means that, MOST likely, the price level:

will increase today

V=

y/(m/p)

Compared to inflation, in which ways will hyperinflation MOST likely affect menu costs and shoeleather costs?

both will increase

The theoretical separation of real and nominal variablesnwhich implies that nominal variables do not influence real variables

classical dichotomy

if inflation turns out to be lower than expected, the _____ wins and the _____ loses because the repayment is worth _____ than the two parties anticipated.

creditor, debtor, more

if inflation turns out to be higher than expected, the _____ wins and the _____ loses because the repayment is worth _____ than the two parties anticipated.

debtor, creditor, less

PY

dollar value of output

PY is the

dollar value of output

The real interest rate anticipated when a loan is made; the nominal interest rate minus expected inflation.

ex ante real interest rate

The real interest rate actually realized; the nominal interest rate minus actual inflation.

ex post real interest rate

The nominal interest rate i moves one-for-one with changes in

expected inflation, Eπ

The one-for-one influence of expected inflation on the nominal interest rate.

fisher effect

_____ determines the rate of inflation

growth in money supply

real interest rate, r=

i - pi

fisher equation

i = r + pi

ex ante real interest rate

i-Epi

ex post real interest rate

i-pi

more precise fisher equation

i=r+Epi

the revenue that governments can raise by printing money

inflation tax

Suppose that automatic teller machines (ATMs) have just been introduced and are gaining popularity. How will this affect the money demand variable k and the money velocity V

k will decrease, v will increase

The cost of changing a price.

menu costs

A function showing the determinants of the demand for real money balances

money demand function

The property that a change in the money supply does not influence real variables.

money neutrality

money demand is equal to

money supply

the quantity theory implies that the price level is proportional to the

money supply

GDP deflator is the ratio of

nominal GDP to real GDP

a change in the quantity of money (M) must cause a proportionate change in

nominal GDP, py

The interest rate that the bank pays is the

nominal interest rate

______ is the opportunity cost of holding money

nominal interest rate

i stands for

nominal interest rate

the quantity of money determines the _____ and that the rate of growth in the quantity of money determines the _____

price level, rate of inflation

is a primary cause of hyperinflation

printing money to finance expenditure

if velocity is fixed, the _______determines the dollar value of the economy's output.

quantity of money

The doctrine emphasizing that changes in the quantity of money lead to changes in nominal expenditure

quantity theory of money

nom int rate, i=

r + pi

the increase in your purchasing power is the

real interest rate

M/P is

real money balances

The quantity of money expressed in terms of the quantity of goods and services it can buy

real money balances

when demand for money (M/P)^d falls, the velocity of money

rises

The revenue raised by the government through the creation of money; also called the inflation tax.

seigniorage

The cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank.

shoeleather cost of inflation

hus, the quantity theory of money states that _____ has ultimate control over the rate of inflation.

the central bank

quantity equation

MV=PT

most common version of quantity equation

MV=PY

number of dollars exchanged in a year=

PT


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