Lecture8-Chapter14 (1).pdf - Chapter 14 Inflation and...

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Money, Banking, and Financial Markets Chapter 14: Inflation and Deflation
Inflation and Deflation Learning Objectives This chapter introduces you to: Concepts and definitions of inflation The long-run relationship between money and inflation Factors determining the growth of money The costs of inflation Deflation and the liquidity trap CHAPTER 14 Inflation and Deflation
Inflation and Deflation Inflation and Deflation Inflation is measured as the percentage change in prices over a period of time, typically one year. A hyperinflation is inflation of more than 50 percent per month (or roughly 13,000 percent per year). A deflation is a sustained period of negative inflation. CHAPTER 14 Inflation and Deflation
Inflation and Deflation On the side: Inflation, consumer prices (annual %)
Inflation and Deflation On the side: Inflation, consumer prices (annual %)
Inflation and Deflation On the side: Inflation, consumer prices (annual %)
Inflation and Deflation On the side: Inflation, consumer prices (annual %)
Inflation and Deflation On the side: Inflation, consumer prices (annual %)
Inflation and Deflation On the side: Inflation, consumer prices (annual %)
Inflation and Deflation Some Inflation Rates CHAPTER 14 Inflation and Deflation
Inflation and Deflation Inflation In the long run, inflation is determined by the growth rate of the money supply. Sustained inflation means the central bank is expanding the money supply rapidly. Why would a central bank pursue an inflationary policy? What level of inflation harms the economy? How does deflation occur and what are its effects? CHAPTER 14 Inflation and Deflation
Inflation and Deflation Money and Inflation in the Long Run Monetary policy affects real output in the short run, but is neutral in the long run. Monetary policy has its strongest effects on inflation in the long run. Expenditure and supply shocks cause year-to-year changes in the inflation rate. Average inflation over long periods is closely tied to the growth of the money supply. CHAPTER 14 Inflation and Deflation
Inflation and Deflation Velocity and the Quantity Equation The velocity of money is the ratio of total spending to the money supply; it measures how quickly money circulates through the economy: V = total spending/ M If spending is $500 and the money supply is $100, velocity is 5 = (500/100). CHAPTER 14 Inflation and Deflation
Inflation and Deflation Velocity and the Quantity Equation Total spending is nominal GDP; the price level ( P ) times real output ( Y ): V = PY/M Velocity is how quickly money circulates, or how many times $1 is spent over a year. The quantity equation of money is the relationship among the money supply, velocity and nominal GDP: MV = PY CHAPTER 14 Inflation and Deflation
Inflation and Deflation Velocity and Money Demand The concept of velocity is related to the concept of

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