Chapter 12

Adjusts to make the quantity of money demanded equal the quantity of money supplied.

Nominal Interest Rate

Is the relationship between the quantity of money demanded and the nominal interest rate, when all other influences on the amount of money that people want to hold remain the same.

Demand for money

Is an equation that states that the quantity of money multiplied by the velocity of circulation equals the price level multiplied by real GDP. Is used by the Federal Reserve to predict the potential of inflation to occur.

Equation of exchange

The velocity of circulation = V The quantity of money = M The price level = P Real GDP = Y Then the equation of exchange is M x V = P x Y

Equation of exchange

When the economy is performing very well by itself, the company is at a full employment. If the federal reserve makes the mistake of increasing the amount of money in circulation it will cause inflation to go up by the same percentage increase in money supply. 2%

Quantity theory of money

The demand for money ___ as real GDP increases because expenditures and incomes increase when real GDP increases.

Real GDP increases

When people are demanding more money the demand curve shifts to the ___. Because of the increase of the general prices.

Right

Is the relationship between the quantity of money supplied and the nominal interest rate.

Supply of Money

An x percent rise in the price level brings an x percent increase in the quantity of money that people plan to hold because the number of dollars we need to make payments is proportional to

The Price Level

The quantity of money supplied is determined by....

The actions of the banking system and the Fed.

Benefit of Holding Money

The benefit of holding money is the ability to make payments.

Opportunity Cost of Holding Money

The opportunity cost of holding money is the interest forgone on an alternative asset.

Is the number of times in a year that the average dollar of money gets used to buy final goods and services. Speed at which money is circulating in an economy.

Velocity of circulation

___ have made it easier to buy goods and services on credit and have ___ the demand for money.

credit cards, decreased

The opportunity cost of holding money is the ___ because it is the sum of the real interest rate on an alternative asset plus the expected inflation rate, which is the rate at which money loses buying power.

nominal interest

The nominal interest rate is the only influence on the ___ that is free to fluctuate to achieve money market equilibrium.

quantity of money demanded

A change in any other influence on money holdings changes the demand for money. The three main influences are

-The price level -Real GDP -Financial Technology

Because, in the long run, both velocity growth and real GDP growth are independent of the growth rate of money: A change in the money growth rate brings an equal change in the inflation rate.

...

If they are trying to predict inflation they look at "P" (price level) the change in price level.

...

M x V = P x Y GM + GV = GP + GY(GROWTH RATES)

...

There was no inflation in the first circulation because the growth rate.. increase in the quantities of goods and services was equal to sum of the...

...

A change in the ___ brings a change in the quantity of money demanded.

nominal interest

Daily interest on checking deposits, automatic transfers between checking and savings accounts, automatic teller machines, debit cards, and smart cards have increased the ___ of money and ___ the demand for money.

Financial Technology marginal benefit, increased MOVES DEMAND CURVE TO THE RIGHT

An inflation rate that exceeds 50 percent a month is called

Hyperinflation

Change in the level of prices

Inflation

Is the amount of money that households and firms choose to hold.

Quantity of money demanded