CHAPTER 17: MONEY GROWTH AND INFLATION

1. In the long run, money supply and money demand are brought into equilibrium by
the overall level of prices.

2. If the price level is above the equilibrium level, people will want to hold more
money than the Fed has created, so the price level must fall to balance supply and
demand.

3. If the price level is below the equilibrium level, people will want to hold less money
than the Fed has created, and the price level must rise to balance supply and
demand.

4. At the equilibrium price level, the quantity of money that people want to hold
exactly balances the quantity of money supplied by the Fed.

5. The supply curve is vertical because the Fed has fixed the quantity of money
available.

6. The demand curve for money is downward sloping, indicating that when the value
of money is low (and the price level is high), people demand a larger quantity of it to
buy goods and services.

7. At the equilibrium, the quantity of money demanded balances the quantity of

money supplied. This equilibrium of money supply and money demand determines
the value of money and the price level.

8. Increase in the money supply

9. Money in liquid form: A liquid asset is a reference to cash on hand or an asset that
can be readily converted to cash
10. Quantity of money demanded:
+ Negatively related to the value of money
+ Positively related to the P, other things equal.
W
11. Real wage= (W: nominal wage= price of labour e.g: $15/h; P: price level= price of
P
goods and services e.g: $5/unit of output)
P ×Y
12. Velocity formula: V = ↔ V × M =P× Y ( p × y=nominal GDP ¿
M
P: price level
Y: real GDP
M: money supply
V: velocity
13. Hyperinflation (siêu lạm phát): happen when inflation exceeding 50% per month
14. Excessive growth in the money supply always cause hyperinflation
15. The inflation tax= revenue the gorvenment raises by creating money
16. Fisher effect: in long run result:
+ Higher inflation rate
+ Higher nominal interest rate
17. Tax distortions:
+ Inflation makes nominal income grow faster than real income
+ Taxes are based on nominal income, and some are not adjusted for inflation.
 + Inflation causes people to pay more taxes even when their real incomes don’t
increase
18. Interest income = deposit x nominal interest rate