Chapter 30: Money Growth and Inflation

Inflation

The Increase in the overall level of prices

Deflation

The decrease in the overall level of prices

Hyperinflation

an extraordinary rate of inflation

Price Level

measure of the value of money

Consumer Price Index

A measure of the overall cost of the goods and services bought by a typical consumer

Monetary Injection

shifts the supply curve to the right from MS1 to MS2

Quantity Theory of Money

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

Nominal Variables

variables measured in monetary units

Real Variables

variables measured in physical units

Classical Dichotomy

the theoretical separation of nominal and real variables

Monetary Neutrality

the proposition that changes in the money supply do not affect real variables

Velocity of Money

the rate at which money changes hands

Quantity Equation

the equation M X V = P X Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services

Inflation tax

the revenue the government raises by creating money

Fisher Effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

Shoeleather Costs

the resources wasted when inflation encourages people to reduce their money holdings

Menu Costs

the cost of changing prices