Chapter 30

This chapter helped explain inflation and money growth, the relationships among both, and the difficulties that come along. Inflation being the increase in prices, but a decreasing value in the money held. Hyperinflation being inflation that exceeds over fifty percent per month. And deflation being the drop in prices and the increasement in value of money. In the long run the level of prices and the level at which the demand equals the supply will adjust. The quantity theory of money, asserts that the quantity of money available determines the price level and the growth rate in the quantity of money available determined by the inflation rate. Then there is the dichotomy of nominal variables (variables measured by money units) and real variables(variables measured with physical units). Bringing about the monetary neutrality which is the proposition that changes in the money supply do not affect real variables, since real variables are not measured in money. Velocity of money is the rate at which money changes hands. Represented by the nominal value(price level times the quantity of output) over the quantity of money. Which can be modified into M•V= P•Y, relative to the quantity equation. The inflation tax is a tax that is taxed on everyone holding money, that refers to the revenue the government raises to pay its spending by printing money. The fisher effect comes about when there is an adjustment of the nominal interest rate and the inflation rate. Costs of inflation would include the shoe leather cost, and the menu costs as well as distortions and confusions including that of the redistribution of wealth.