Notes/ Class Study Guide
Notes/ Class Study Guide Econ 202
Popular in Intermediate Macroeconomics
Popular in Economics
This 7 page Study Guide was uploaded by Hope Johnson on Monday October 10, 2016. The Study Guide belongs to Econ 202 at Rhodes College taught by Dr. Gramm in Fall 2016. Since its upload, it has received 13 views. For similar materials see Intermediate Macroeconomics in Economics at Rhodes College.
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Date Created: 10/10/16
Inflation Tax Monday, October 10, 2016 2:07 PM Inflation Tax - Revenue the gov't creates by printing money Nominal variables - measured in monetary units Real Variables - measured in physical units Monetary neutrality -proposition that changes in the Ms do not affect real variables (LR) In the Short Run , Ms changes can influence the economy Quantity Theory of money Velocity of Money - The rate at which money changes hands V = PY / M = Nom GDP / Money Supply MV = PY Money supply x Velocity = Price level x Real GDP (FED) Or movement in exogenous predictable The fixed money supply … something about gold standard… the economy experienced dramatic growth; M/P = Real money balances Money Demand Function: (M/P) ^d / kY Quantity Equation of Money (pg 102) If the Q of money increases and the velocity of money remains unchanged, then either the price or the number of transactions must rise. Quantity Equation of Money (pg 102) If the Q of money increases and the velocity of money remains unchanged, then either the price or the number of transactions must rise. M0 = $800 Billion V0 - 10 Po = 10 Yo - $8000 Bill 1) No change in the MS M1 = $800 Billion V1= 10 P1 = ? Y1 = $8400 Billion i) M1=? V1=10 P1 = 1 Y1 = $8400 Bill M1 = (10) = (1) (8400) M1 = 8400/10 = 840 Billion M = pi + y 0% = 0% pi + 5% Pi = -5% Quanity Equation in Percentage change form: % Change in M + % Change in V = % Change in P + % Change in Y. Fisher effect - one to one adjustment of the nominal interest rate to inflation If real wages rise of stay the same, __________ isn't' worse off Unexpected Inflation redistributes wealth Shoe leather costs - resources wasted when inflation encourages people ot reduce their money holdings ( hyperinflation) Lenders want deflation Unexpected Inflation redistributes wealth Shoe leather costs - resources wasted when inflation encourages people ot reduce their money holdings ( hyperinflation) Lenders want deflation We set the borrowing and lending rate based on expectations of inflation Interest rate of 7% factors into a real cost of borrowing at 2% with expected inflation (pi^e) of 5% Next period -no inflation, the lender wins at the expense of the borrower Inflation distorts growth
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