ECON1010 Lecture Notes - Lecture 8: Fisher Hypothesis, Economic Equilibrium, Seigniorage

28 views5 pages

ceruleanwildebeest331

6 Jun 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Lecture 8

INFLATION

• Inflation is an increase in the overall level of prices.

• Deflation is a decrease in the overall price level.

• Hyperinflation is an extraordinarily high rate of inflation.

CAUSES OF INFLATION

• If P is the price of goods and services, measured in terms of money, then 1/P is the value of money

measured in terms of goods and services.

• When the overall price level rises, the value of money falls.

• The demand and supply of money determine the value of money.

What is the easiest ay to eate high iflatio?

• Milto Fieda Iflatio is alays ad eeyhee a oetay pheoeo.

What does he mean?

• The quantity theory of money is used to explain the long-run determinants of the price level and the

inflation rate.

MONEY SUPPLY

• The money supply is a policy variable that is controlled by the central bank.

• Through instruments such as open-market operations, the central bank directly controls the quantity

of money supplied by the banking system.

• Note that the RBA no longer targets the money supply. The RBA now targets interest rates and

inflation.

MONEY DEMAND

• Money demand has several determinants, including interest rates and the average level of prices in

the economy.

• People hold money because it is the medium of exchange.

• The amount of money people choose to hold depends on the prices of goods and services.

THE CLASSICAL DICHOTOMY AND MONETARY NEUTRALITY

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

• Nominal variables are variables measured in monetary units.

• Real variables are variables measured in constant units.

• This separation is the classical dichotomy.

• According to the classical dichotomy, different forces influence real and nominal variables.

• Real economic variables do not change with changes in the money supply.

• Changes in the money supply affect nominal variables but not real variables.

• The irrelevance of monetary changes for real variables is called monetary neutrality.

QUANTITY THEORY OF MONEY

• The velocity of money refers to the speed at which the typical dollar bill travels around the economy

from wallet to wallet.

• Velocity (V) = nominal GDP (P × Y) / money supply (M)

• The quantity equation:

M  V = P  Y

VELOCITY AND THE QUANTITY EQUATION

• The quantity equation shows that an increase in the quantity of money in an economy must be

reflected in one of the three other variables:

– the price level must rise

– the quantity of output must rise, or

– the velocity of money must fall.

• Explaining the equilibrium price level, inflation rate and the quantity theory of money:

– Assume the velocity of money is relatively stable over time.

– When the central bank changes the quantity of money, it causes proportionate changes in

the nominal value of output (P  Y).

– Because money is neutral, money does not affect output.

• When the central bank alters the money supply, these changes are reflected in prices.

• Therefore, when the central bank increases the money supply rapidly, the result is a high rate of

inflation.

MONEY NEUTRALITY

• The figure shows that velocity of money is relatively stable over time

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Inflation is an increase in the overall level of prices: deflation is a decrease in the overall price level, hyperinflation is an extraordinarily high rate of inflation. The demand and supply of money determine the value of money. What is the (cid:858)easiest(cid:859) (cid:449)ay to (cid:272)(cid:396)eate high i(cid:374)flatio(cid:374): milto(cid:374) f(cid:396)ied(cid:373)a(cid:374) (cid:858)i(cid:374)flatio(cid:374) is al(cid:449)ays a(cid:374)d e(cid:448)e(cid:396)y(cid:449)he(cid:396)e a (cid:373)o(cid:374)eta(cid:396)y phe(cid:374)o(cid:373)e(cid:374)o(cid:374). (cid:859) The quantity theory of money is used to explain the long-run determinants of the price level and the inflation rate. The money supply is a policy variable that is controlled by the central bank. Through instruments such as open-market operations, the central bank directly controls the quantity of money supplied by the banking system: note that the rba no longer targets the money supply. The rba now targets interest rates and inflation. Money demand: money demand has several determinants, including interest rates and the average level of prices in the economy. People hold money because it is the medium of exchange.

Related Questions

If P denotes the price of goods and services measured in terms of money, then

a.1/Prepresents the value of money measured in terms of goods and services.

b.P can be interpreted as the inflation rate.

c.the supply of money influences the value of P, but the demand for money does not.

d.All of the above are correct

ultramarineeagle335

1.The classical theory of inflation

A. Is also known as the quantity theory of money.

B.was developed by some of the earliest economic thinkers.

C.is used by most modern economists to explain the long-run determinants of the inflation rate.

D.All of the above are correct.

2.To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

A.quantity theory of money.

B.price-index theory of money.

C.theory of hyperinflation.

D.disequilibrium theory of money and inflation.

3.When the price level rises, the number of dollars needed to buy a representative basket of goods

A.increases, and so the value of money rises.

B.increases, and so the value of money falls.

C.decreases, and so the value of money rises.

D.decreases, and so the value of money falls

4.The supply of money is determined by

A.the price level.

B.the Treasury and Congressional Budget Office.

C.the Federal Reserve System.

D.the demand for money.

6.Economic variables whose values are measured in monetary units are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.Economic variables whose values are measured in goods are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.The classical dichotomy refers to the idea that the supply of money

A. is irrelevant for understanding the determinants of nominal and real variables.

B.determines nominal variables, but not real variables.

C.determines real variables, but not nominal variables.

D.is a determinant of both real and nominal variables.

8.According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

A.the price level

B.nominal wages

C.nominal GDP

D.All of the above are correct.

9.Monetary neutrality implies that an increase in the quantity of money will

A.increase employment.

B.increase the price level.

C.increase the incentive to save.

D.not increase any of the above.

10.The velocity of money is

A.the rate at which the Fed puts money into the economy.

B.the same thing as the long-term growth rate of the money supply.

C.the money supply divided by nominal GDP.

D.the average number of times per year a dollar is spent.

11.If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?

A.2.25

B.3.00

C.6.50

D.None of the above is correct.

12.According to the assumptions of the quantity theory of money, if the money supply increases by 5 per cent, then

A.nominal and real GDP would rise by 5 per cent.

B.nominal GDP would rise by 5 per cent; real GDP would be unchanged.

C.nominal GDP would be unchanged; real GDP would rise by 5 per cent.

D.neither nominal GDP nor real GDP would change.

13.The inflation tax refers to

A.the revenue a government creates by printing money.

B.higher inflation which requires more frequent price changes.

C.the idea that other things the same, an increase in the tax rate raises the inflation rate.

D.taxes being indexed for inflation.

14.The inflation tax falls most heavily on

A.those who hold a lot of currency and accounts for a large share of U.S. government revenue.

B.those who hold a lot of currency but accounts for a small share of U.S. government revenue.

C.those who hold little currency and accounts for a large share of U.S. government revenue.

D.those who hold little currency but accounts for a small share of U.S. government revenue.

15.The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the

A.Friedman Effect.

B.Hume Effect.

C.Fisher Effect.

D.None of the above is correct.

16.The nominal interest rate is 3 per cent and the inflation rate is 2 per cent. What is the real interest rate?

A.6 per cent

B.5 per cent

C.1.5 per cent

D.1 per cent

17.Which of the following helps to explain why the inflation fallacy is a fallacy?

A.Increases in the price level can be created by increases in money demand.

B.Nominal incomes tend to rise at the same time that the price level is rising.

C.As the price level rises, the value of a dollar falls.

D.Inflation only changes nominal variables.

18.The shoe-leather cost of inflation refers to

A.the re distributional effects of unexpected inflation.

B.the time spent searching for low prices when inflation rises.

C.the waste of resources used to maintain lower money holdings.

D.the increased cost to the government of printing more money.

19.Which of the following is an example of menu costs?

A.deciding on new prices

B.printing new price-lists

C.advertising new prices

D.All of the above are examples of menu costs.

20.Which of the following are U.S. taxpayers allowed to adjust for inflation for income taxes?

A.both interest in income and capital gains.

B.interest income but not capital gains.

C.capital gains but net interest income.

D.neither interest income nor capital gains.

21.You put money into an account and earn a real interest rate of 4 per cent. Inflation is 2 per cent, and your marginal tax rate is 20 per cent. What is your after-tax real rate of interest?

A.1.2 per cent

B.2.8 per cent

C.4.8 per cent

D.None of the above is correct.

22.Which of the following is correct? Inflation

A.impedes financial markets in their role of allocating resources.

B.reduces the purchasing power of the average consumer.

C.generally increases after-tax real interest rates.

D.is most costly when anticipated.

23.Wealth is redistributed from creditors to debtors when inflation is

A.high, whether it is expected or not.

B.low, whether it is expected or not.

C.unexpectedly high.

D.unexpectedly low.

amberdinosaur553

Question 2

For any given expected inflation rate, short-run aggregate supply curves show the relationship between

the money supply and growth rate of output.

inflation and growth rate of output.

production factors and wages.

inflation and wages.

1 points

Question 3

Why is the SRAS curve steeper above its intersection with the Solow growth curve?

		Wages are stickier in the upward direction.
		Wages are less sticky in the upward direction.
		Lower inflation will lead to faster growth.
		Employees become less motivated to work during times of unexpected inflation.

1 points

Question 4

What factors triggered the Great Depression?

		decreased consumer spending and tight monetary policy
		decreased investment and increased inflation
		decreased employment and increased money supply
		decreased inflation and increased income taxes

1 points

Question 5

How might changes in the money supply be non-neutral in the short run?

		As the amount of money circulating in the economy changes before prices respond, consumers' purchases change accordingly, which leads producers to change production levels.
		When money supply changes in the short run, it will affect nominal, but not real, variables in the short run.
		As money growth increases at a faster rate, it will cause real GDP to grow at an equally faster rate.
		If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation.

1 points

Question 6

For a given nominal interest rate, an increase in deflation will cause the real rate of interest to

remain relatively constant.

increase.

decrease.

become unpredictable.

Question 8

Which of the three price indexes measures the average price level of the largest total number of goods?

		the consumer price index
		the GDP deflator
		the producer price index
		Each price index accomplishes the same task.

The textbook uses the

ECON1010 Lecture Notes - Lecture 8: Fisher Hypothesis, Economic Equilibrium, Seigniorage

Document Summary

Get access

Related Documents

ECON1010 Lecture Notes - Lecture 9: Real Wages, Money Supply, Longrun

ECON1010 Lecture Notes - Lecture 3: The Automatic, Gdp Deflator, Real Interest Rate

ECON1010 Lecture Notes - Lecture 7: Reserve Bank Of Australia, Investment Banking, Open Market Operation

Related Questions

		the money supply and growth rate of output.
		inflation and growth rate of output.
		production factors and wages.
		inflation and wages.