Economics: Inflation and Money Theory

The amount of money that people want to hold in relation to their income.

The average number of times a dollar is spent on goods and services in a period of time.

A simple equation showing the relationship between money supply, velocity, price level, and real output.

The relationship between money demand and the velocity of money in the quantity equation.

An assumption that the velocity of money remains constant.

A theory that states changes in the money supply directly affect the price level.

The relationship between the demand for money and income.

The ratio of nominal GDP to the quantity of money.

The revenue generated by a government through printing money.

A tax levied on the holders of money through inflation. It reduces the real value of their money.

The rate at which prices increase over time.

The increase in the money supply, usually by a central bank.

The correlation between money growth and inflation is relatively strong.

When the government spends more than it collects in taxes, it can finance the difference through borrowing or printing money.

The practice of a government using money printing as a source of revenue.

A government can finance its spending by taxing citizens, borrowing money, or printing money.

The total value of all transactions in an economy, calculated by multiplying the price of each transaction by the number of transactions. It reflects the total dollar value exchanged within a specific time period.

The money supply, measured as the total amount of money circulating in an economy at a given time.

The total value of all goods and services produced within an economy during a specific period, usually a year. It serves as a proxy for the total value of transactions in the economy.

The total number of transactions that occur in an economy within a specific time period.

The price level in an economy, often measured by an index like the Consumer Price Index (CPI). It reflects the average price of goods and services.

The value of all transactions in the economy, calculated by multiplying the price level (P) by the number of transactions (T). This value represents the total amount of money changing hands in the economy.

A mathematical equation that relates the nominal interest rate, real interest rate, and inflation rate.

The one-to-one relationship between the inflation rate and the nominal interest rate. A 1% increase in inflation is matched by a 1% increase in the nominal interest rate.

The interest rate that is adjusted for inflation. It represents the real return on an investment after accounting for the erosion of purchasing power due to rising prices.

The interest rate that is not adjusted for inflation. It is the rate you see quoted on loans and deposits.

The correlation between inflation and nominal interest rates is generally high, indicating that countries with high inflation tend to have higher nominal interest rates, and vice versa.

Empirical data over time in the United States shows a strong correlation between inflation and nominal interest rates, supporting the Fisher Effect. The relationship between inflation and nominal interest rates has generally held true.

A cross-country comparison of inflation and nominal interest rates also confirms the Fisher Effect. Countries with higher inflation rates generally have higher nominal interest rates. This provides further evidence for the Fisher Effect.

The equation represents the equilibrium in the money market, where the supply of real money balances equals the real money demand.

The real money supply is determined by the central bank, represented by 'M' in the equation. It's not influenced by changes in the economy in the long run.

The real interest rate 'r' adjusts to ensure that saving (S) matches investment (I) in the long run. This ensures equilibrium in the loanable funds market.

Output 'Y' is determined by the factors of production (capital 'K' and labor 'L') in the long run, reflecting the economy's productive capacity.

The price level 'P' adjusts to ensure that the real money supply equals the real money demand, which is determined by the nominal interest rate and output in the long run.

People's expectations of future inflation can directly impact the current price level, even if the money supply today remains unchanged.

A higher nominal interest rate increases the cost of holding money, leading to a decrease in the demand for real money balances.

The relationship between the quantity of money, the price level, real money balances, and the demand for real money balances.

An increase in the money supply causes a proportional increase in the price level, assuming other factors (e.g., interest rates, output) remain constant.

In the long run, people's expectations of inflation tend to be accurate, meaning expected inflation equals actual inflation.

Changes in the money supply do not affect real variables like output and employment in the long run.

Changes in expected inflation can affect the demand for real money balances and ultimately the price level, even if the money supply remains constant.