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rev ch 22 - valuable Thus inflation is like a tax on...

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1. When the price level increases, people have to pay more for the goods and services they buy. And since price level is viewed as a measure of the value of money. A rise in price level means a lower value of money because each dollar in your pocket now buys a smaller quantity of goods and services. 2. An increase in the quantity of money makes dollars more plentiful, the result is an increase in the price level that makes each dollar less valuable. 3. Nominal variables measured in monetary units and real variables measured in physical units. Example: income of corn farmers is nominal variables: measured in dollars. Quantity of corn produced is real variables: measured in bushels. According to principle of monetary neutrality, changes in quantity of money affect nominal variables not real variables 4. When the government raises revenue by printing money, it is said to levy an inflation tax. Because when the government prints money, the price level rises, and the dollars in your wallet are less
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Unformatted text preview: valuable. Thus, inflation is like a tax on everyone who holds money. When the government has high spending, inadequate tax revenue, then printing dollars is the easiest way to pay for its spending. Massive increase in the quantity of money leads to massive inflation. 5. According to the Fisher effect, increase in inflation rate does not affect real interest rate because real interest rate is real variable. The nominal interest rate must adjust one-for-one to changes in the inflation rate resulting in a higher inflation rate and higher nominal interest rate in the long run. 6. Costs of inflation are shoeleather costs, which are the resources wasted when inflation encourages people to reduce their money holdings, and menu costs which are costs of changing prices. 7. If inflation is less than expected, it is beneficial to creditors. Less than expected inflation will enrich creditors at the expense of the debtors because it increases the real value of the debt....
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