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lecture 6: money growth and inflation, image - Coggle Diagram
lecture 6: money growth and inflation
definition and measure, types, cause of inflation
inflation is the situation that price levels increase overall in economy.
deflation: the decrease in the overall level of prices in the economy
disinflation: the reduction in the rate of inflation
hyperinflation: an extraordinary high rate of inflation (over 1000%)
inflation rate: the percentage in price level from the previous period = inflation rate in yr2 = ((cpi2-cpi1)/cpi1)x100
types of inflation:
demand pull-inflation: AD rise quickly run ahead AS, S cannot rise bcz constrain by factor (L, technology knowledge, H, K, N), excess D cause increase
cost-pust inflation: rise in production costs (wage and salary, raw material and components, government taxes, ect), profit margin decrease and supplier rise price (rise SRAS curve)
level of price and the value of money
level of price (P):
number of dollars needed to buy a basket of goods and services ><
value of money (1/P)
: number of goods and services bought buy each dollar, (P high=> 1/P fall)
money supply, oney demand, monetary equilibrium:
money supply (MS)
: by central bank bank system, Q of MS is policy variable central bank controls directly and completely
Money demand ( MD)
: determine by many factors (reliability on credit cards, whether ATM easy to find, interest rate, overal
price level
in E-important in long run)
money equilibrium:
point Qms=Qmd. ppl hold more $ => 1/P fall and P high
the effect monetary injection: (bơm tiền) increase MS
the quantity theory of money: how P determined, why it may change overtime:
Q of $ in the economy determines the price levels
the primary cause inflation is growth in Q of $
Classical Dichotomy and Monetary Neutrality
classical Dichotomy
: the separation of economic variables into two group:
nominal variables: variable measured in monetary units
real variables: measured by physical units
monetary neutrality: change in the money supply affect nominal variables but not real variables
velocity and the quantity equation
velocity of money
: the speed at which typical dollar bills travel around in the economy from wallet to wallet
M x V = P x Y
where
:
V velocity
P the price level
Y quantity of output, GDP
M quantity of money
M x V = nominal value of output
Quantity theory of money M = (P x Y)/V => the increase Q of $ cause by three variables
but V is relative stable => change M -> change (P x Y)
but money is neutral => does not effect Y => change M => change P
the rapid increase in money supply causes high inflation rate.
the inflation tax: revenue that gov raise printing money (tax for everyone who hold $)
hyperinflation by gov's high spending
inflation ends when gov fiscal reform as cuts G
the fiscal effect: the inflation rise, the nominal ir increase the same amount, and real ir stable
The real interest
rate is the nominal interest rate minus the inflation rate= real ir = no ir -inflation rate. => no ir = real ir + inflation rate
the cost of inflation: a fall in purchasing power?
P cause inflation, so the ppl income by sale services
pay more what they buy
get more what they sell
=> nominal income tend keep pace with rising price (keep pace giữ tốc độ hoặc giữ nhịp độ)
=> inflation dont reduce purchasing power
shoeleather cost:
is the opportunity cost of time and effort people expend by holding less cash to reduce inflation tax that they pay on cash holdings when high inflation.
inflation fall real value of money -> ppl minimize cash holdings -> more frequent trips to bank to withdraw $ from interest-bearing accounts
menu cost:
cost of price adjustment
relative price:
(giá tương đối) the price of one good compared to others in economy - scare resource => high price
Inflation-induced tax distortion: (biến dạng thuế do lạm phát) inflation blow up size capital gains -> rise tax burden on capital gains
