macro ch5
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
