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23 Cards in this Set
- Front
- Back
the demand for money reflects what?
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how much wealth people want to hold in liquid form
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A higher price level (or lower value of money) increases the quantity of money demanded?
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true
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IN the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply
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true
At the equilibrium price level, the quantity of money that people want to hold exactly balances the quantity of money supplied by the fed |
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The equilibrium of money supply and money demand determines the value of money and the price level
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True--Review page 667!
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When an increase in the money supply makes dollars more plentiful, the result is an increase in the price level that makes each dollar less valuable
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true! see page 678
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Quantity Theory of Money
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A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
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Economic variable shoudl be divided into 2 groups
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Nominal Variables: variables measured in monetary units
Real variables: variables measured in physical units |
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Dollar prices are nominal variables, relative prices are real variables
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true
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Review page 669...
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yup
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Changes in the supply of money affect real variables but not nominal ones?
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FALSE!!!
The irrelevance of monetary changes for real variable is called monetary neutrality remember ruler analogy. Dollar is just a measurement tool |
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Velocity of Money
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The rate at which money changes hands
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V = (Price level * Nominal GDP)/Quantity of Money
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Velocity equation
V = (P * Y)/M |
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M * V = P * Y
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Velocity equation rearranged
Money Supply * Velocity = Price Level * Nominal GDP |
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5 Steps to the Quantity Theory of Money
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1. The velocity of money is relatively stable over time
2. Because velocity is stable, when the central bank changes teh quantity of money (M), it causes proportionate changes in the nominal value of output (P*Y) 3. The economy's output of goods and services (Y) is primarily determined by factor supplies (labor, physical capital, human capital, and natural resources) and teh available production technology. In particular, because money is neutral, money does NOT affect output 4. With output (Y) determined by factor supplies and technology, when the central bank alters the money supply (M) and induces proportional changes in the nominal value of output (P*Y), these changes are reflected in changes in the price level (P) 5. Therefore, when the central bank increases the money supply rapidly, the result is a high rate of inflation |
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Inflation Tax
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The revenue the government raises by creating (printing) money
When the government prints money, the price level rises, and the dollars in your wallet are less valuable--The inflation tax is like a tax on everyone who holds money |
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Real interest rate
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corrects the nominal interest rate for the effect of inflation to tell you how fast the PURCHASING POWER of your savings account will rise over time.
Nominal Interest Rate - Inflation rate = R. INterest Rate |
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Nominal Interest rate
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tells you how fast the NUMBER OF DOLLARS in your account will rise over time
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What determines the real interest rate?
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supply and demand for loanable funds
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What determines the inflation rate?
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growth in the money supply
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when the fed increases the rrate of money growth, the long run result is both a higher inflation rate and a higher nominal interest rate
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Nominal Interest Rate = Real Interest Rate + Inflation Rate
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Fisher effect
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the one for one adjustment of the nominal interest rate to the inflation rate
states that the nominal interest rate adjusts to expected inflation |
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because inflation in incomes goes hand in hand with inflation in prices...
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inflation does not in itself reduce people's real purchasing power
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What are the 6 Costs of Inflation?
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1. Shoeleather Costs
2. Menu Costs 3. Tax liability 4. confusion inconvenience 5. Arbitrary redistribution of wealth 6.increased variability of relative prices |