Macro Final

MV=PY

quantity equation

velocity of money

rate at which money changes hands

costs of inflation

shoeleather costs, menu costs, disproportionate taxation, ineffecient markets, arbitrary redistribution

menu costs

the costs incurred by firms changing prices (i.e., reprinting the menu)

the fisher effect

the one-for-one adjustment of nominal interest rate to real interest rate

inflation tax

the revenue the government raises by creating money

classic dichotomy

theoretical separation of nominal and real variables

monetary neutrality

theory that changes in the money supply do not impact real variables

quantity theory of money

theory that suggests the quantity of money available determines the price level and that the growth rate in the quantity of money available determines inflation rate

shoeleather costs

time and energy spent reducing monetary holding in response to inflation

nominal variables

variables measured in monetary units

real variables

variables measured in physical units