MACROECONOMICS-CH4

CHAPTER FOUR Money and Inflation

In this chapter you will learn ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

U.S. inflation & its trend, 1960-2001

The connection between money and prices ,[object Object],[object Object],[object Object]

Money: definition ,[object Object]

Money: functions ,[object Object],[object Object],[object Object]

Money: types ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Discussion Question ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The money supply & monetary policy ,[object Object],[object Object],$$$

The central bank ,[object Object],[object Object],The Federal Reserve Building Washington, DC

Money supply measures, April 2002 ,[object Object],[object Object],[object Object],[object Object],[object Object]

The Quantity Theory of Money ,[object Object],[object Object]

Velocity ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Velocity, cont. ,[object Object],where V = velocity T = value of all transactions M = money supply

Velocity, cont. ,[object Object],[object Object],where P = price of output (GDP deflator) Y = quantity of output (real GDP) P  Y = value of output (nominal GDP)

The quantity equation ,[object Object],[object Object]

Money demand and the quantity equation ,[object Object],[object Object]

Money demand and the quantity equation ,[object Object],[object Object],[object Object],[object Object]

back to the Quantity Theory of Money ,[object Object],[object Object],[object Object]

The Quantity Theory of Money , cont. ,[object Object],[object Object],[object Object],[object Object]

The Quantity Theory of Money , cont. ,[object Object],[object Object]

The Quantity Theory of Money , cont. ,[object Object],The result from the preceding slide was: Solve this result for  to get

The Quantity Theory of Money , cont. ,[object Object],Hence, the Quantity Theory of Money predicts a one-for-one relation between changes in the money growth rate and changes in the inflation rate .

International data on inflation and money growth

U.S. data on inflation and money growth

U.S. Inflation & Money Growth, 1960-2001

Seigniorage ,[object Object],[object Object],[object Object]

Inflation and interest rates ,[object Object],[object Object]

The Fisher Effect ,[object Object],[object Object],[object Object],[object Object]

U.S. inflation and nominal interest rates, 1952-1998 Percent 16 14 12 10 8 6 4 2 0 -2 Nominal interest rate Inflation rate 1950 1955 1960 1965 1970 Year 1975 1980 1985 1990 2000 1995

Inflation and nominal interest rates across countries

Exercise: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Answers: ,[object Object],[object Object],[object Object],[object Object],Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4.

Two real interest rates ,[object Object],[object Object],[object Object],[object Object]

Money demand and the nominal interest rate ,[object Object],[object Object],[object Object],[object Object]

The money demand function ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The money demand function ,[object Object],[object Object]

Equilibrium The supply of real money balances Real money demand

What determines what ,[object Object],[object Object],[object Object],[object Object],P adjusts to make

How P responds to  M ,[object Object],[object Object]

What about expected inflation? ,[object Object],[object Object],[object Object],[object Object],[object Object]

How P responds to   e ,[object Object]

Discussion Question ,[object Object],[object Object],[object Object],[object Object]

A common misperception ,[object Object],[object Object],[object Object],[object Object]

Average hourly earnings & the CPI

The classical view of inflation ,[object Object],So why, then, is inflation a social problem?

The social costs of inflation ,[object Object],[object Object],[object Object]

The costs of expected inflation: 1 . shoeleather cost ,[object Object],[object Object],[object Object],[object Object],[object Object]

The costs of expected inflation: 2 . menu costs ,[object Object],[object Object],[object Object],[object Object],[object Object]

The costs of expected inflation: 3 . relative price distortions ,[object Object],[object Object],[object Object],[object Object]

The costs of expected inflation: 4 . unfair tax treatment ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The costs of expected inflation: 4 . General inconvenience ,[object Object],[object Object]

Additional cost of unexpected inflation: arbitrary redistributions of purchasing power ,[object Object],[object Object],[object Object],[object Object],[object Object]

Additional cost of high inflation: increased uncertainty ,[object Object],[object Object],[object Object]

One benefit of inflation ,[object Object],[object Object],[object Object]

Hyperinflation ,[object Object],[object Object],[object Object],[object Object]

What causes hyperinflation? ,[object Object],[object Object],[object Object]

Recent episodes of hyperinflation slide

Why governments create hyperinflation ,[object Object],[object Object],[object Object],[object Object]

The Classical Dichotomy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],slide

The Classical Dichotomy ,[object Object],[object Object],[object Object],[object Object]

Chapter summary ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Chapter summary ,[object Object],[object Object],[object Object]

Chapter summary ,[object Object],[object Object],[object Object],[object Object],[object Object]

MACROECONOMICS-CH4

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