MONEY GROWTH AND INFLATION
CH30
OVERVIEWS
1. The quantity theory of money
•Money supply, inflation, and the value of money
•The classical dichotomy and monetary neutrality
•Quantity equation
•Two applications: Hyperinflation and Fisher effect
2. The cost of inflation
INFLATION – 1
Deflation 物价下降通貨緊縮
Decrease in the overall level of prices
Average level of prices in the U.S. economy was 23%
lower in 1896 than in 1880
Inflation 物价上漲通膨
Increase in the overall level of prices
Substantial variation over time:
2008 – 2018: average rate of 1.5% per year
1970s: average rate of 7.8% per year.
INFLATION – 2
2018, inflation rates:
 2.4 percent in the United States
 1.2 percent in Japan
 4.8 percent in Mexico
 12 percent in Nigeria
 15 percent in Turkey
 32 percent in Argentina
 1.4 million percent per year in Venezuela
Hyperinflation 惡性通膨
,
 An extraordinarily high rate of inflation
貨幣數量說
THE CLASSICAL THEORY OF INFLATION
Prices rise when the government prints too much money.
Most economists rely on the quantity theory of money to
explain long-run determinants of the price level and the
inflation rate
Asserts that the quantity of money determines the value
of money 主張貨幣數量決定貨幣价值
We study this theory using two approaches:
1. A supply-demand diagram
2. An equation
THE LEVEL OF PRICES AND THE VALUE OF MONEY
物价
倒
數
关
係
,
Price level, P: Number of dollars needed to buy a basket of
goods and services
When the price level rises, people have to pay more for the
goods and services they buy.
(
貨幣价值
Value of money, 1/P: The quantity of goods and services that
can be bought with $1
A rise in the price level: lower value of money because each
dollar in your wallet now buys a smaller quantity of goods and
services.
Inflation drives up prices and drives down the value of money.
THE MONEY SUPPLY-DEMAND DIAGRAM – 1
Value of
Money, 1/P
(High)
1
Price
Level, P
As the value of money
rises, the price level falls.
(Low)
1
¾
1.33
½
2
¼
4
(Low)
(High)
Quantity
of Money
MONEY SUPPLY ( MS)
Money supply in the real world
Determined by the Fed, the banking system, and
consumers.
Money supply in this model
We assume the Fed precisely controls MS and sets it at
some fixed amount.
Ex. MS=$1000
THE MONEY SUPPLY-DEMAND DIAGRAM – 2
Value of
Money, 1/P
(High)
Price
Level, P
Money
Supply
(Low)
MS1
1
1
¾
1.33
The Fed sets MS
at some fixed value,
regardless of P.
½
¼
(Low)
2
4
(High)
$1,000
Quantity
of Money
MONEY DEMAND ( MD)
取
Money demand
How much wealth people want to hold in liquid form
Depends on P: an increase in P reduces the value of
money, so more money is required to buy goods and
services.
Quantity of money demanded
Is negatively related to the value of money
And positively related to P, other things equal.
THE MONEY SUPPLY-DEMAND DIAGRAM – 3
Value of
Money, 1/P
(High)
A fall in value of money (or
increase in P) increases the
quantity of money demanded:
Price
Level, P
(Low)
1
1
¾
1.33
½
2
¼
(Low)
Money
demand
MD1
Quantity
of Money
4
(High)
THE EQUILIBRIUM PRICE LEVEL
Value of
Money, 1/P
(High)
1
eq’m
value
of
money
MS1 P adjusts to equate
quantity of money
demanded with
money supply.
(Low)
1
1.33
¾
½
Price
Level, P
A
¼
2
MD1
(Low)
$1,000
Quantity
of Money
4
(High)
eq’m
price
level
THE EFFECTS OF A MONETARY INJECTION
Value of
Money, 1/P
(High)
MS1
1
¾
New
eq’m
value
of
money
½
A
¼
If the Fed
MS2 increases
the money
supply.
Then the
value of
money falls,
and P rises.
Price
Level, P
(Low)
1
1.33
2
貨幣供給 ↑
造成物价上漲
→
通膨
-
New 4
⼆
B
eq’m
4
price
MD1
level
$2,000 Quantity of Money
× 100
通膨率
$1,000
%
=
lo0
1
2
. Initial
efm
A
.
Q
p =Ʃ
=$ 100
,
,
P1
=
2
Suppose the Fed increases the MSLeh open
MS 右移⾄ MS
.
.
-
mke
purchasd
<
An
increase
in
Ms
causes
an
excess
supply of money
處理⼿中多餘貨幣 ⼈們
on
goods and service / deposies / buybond
Spend
→ Increased Kemand
forgood & Service → 在 G & S 供給不變
→
、
it
3
-
The
of money demanded
fuantiey
P↑
untilB
increase
2 4 Q =$
=
,
2,
000
,
THE QUANTITY THEORY OF MONEY
Quantity theory of money
A theory asserting that the quantity of money available
determines the price level and that the growth rate in the
quantity of money available determines the inflation rate
4
貨幣數量理論主張
以
— —
—
貨幣數量決定物价⽔
貨數量成長率決定物价⾓率幣
us
THE CLASSICAL DICHOTOMY – 1
Classical dichotomy 古典⼆分法
The theoretical separation of nominal variables and real
variables
貨幣的
名⽬變數
Nominal variables: measured in ______________
units.
Monetary
Nominal GDP, nominal interest rate (rate of return measured in
$), nominal wage ($ per hour worked) 實体的物品
實際變數
Real variables: measured in ______________
units.
physical
Real GDP, real interest rate (measured in output), real wage
(measured in output)
EXAMPLE 1: REAL VS. NOMINAL WAGE
薪資
The nominal wage, W = $15/hour (the price of labor), and the price
level, P = 5 (the price of goods and services, so it’s $5/unit of output).
The real wage is the price of labor relative to the price of output.
Calculate the real wage.
Real wage = W / P
= ($15/hour) / ($5/unit of output)
= 3 units of output per hour
EXAMPLE 2: THE PRICE AND RELATIVE PRICE OF A GOOD
The price of a smartphone is $450 and
the price of a pepperoni pizza is $10.
What is the relative price of a smartphone?
相对的
The relative price of a good is the price of one good in terms of
another.
The relative price of a smartphone is:
= P smartphone / P pizza
= ($450/smartphone ) / ($10/pizza)
= 45 pizzas per smartphone 每⼀⼿机可換多少 pizza
THE CLASSICAL DICHOTOMY – 2
Classical dichotomy:
理論上分為
Theoretical separation of nominal and real variables
Monetary developments affect nominal variables but not real
variables:
If central bank doubles the money supply:
Then all nominal variables—including prices—will double
But all real variables—including relative prices—will remain
unchanged.
THE NEUTRALITY OF MONEY – 1
貨幣中立性名⽬變數受貨幣影響 但實際變數不會
,
Monetary neutrality:
The proposition that changes in the money supply do not
affect real variables
Doubling money supply
Causes all nominal prices to double
What happens to relative prices?
EXAMPLE 3: THE NEUTRALITY OF MONEY
Initially, relative price of smartphones in terms of pizza is
𝑃 𝑜𝑓 𝑠𝑚𝑎𝑟𝑡𝑝ℎ𝑜𝑛𝑒
𝑃 𝑜𝑓𝑝𝑖𝑧𝑧𝑎
=
$450/𝑠𝑚𝑎𝑟𝑡𝑝ℎ𝑜𝑛𝑒
$10/𝑝𝑖𝑧𝑧𝑎
=
= 45 pizzas per smartphone
If all prices double:
𝑃 𝑜𝑓 𝑠𝑚𝑎𝑟𝑡𝑝ℎ𝑜𝑛𝑒
𝑃 𝑜𝑓𝑝𝑖𝑧𝑧𝑎
=
$900/𝑠𝑚𝑎𝑟𝑡𝑝ℎ𝑜𝑛𝑒
$20/𝑝𝑖𝑧𝑧𝑎
=
= 45 pizzas per smartphone
The relative price is unchanged.
ACTIVE LEARNING 1: THE NEUTRALITY OF MONEY
If the central bank doubles the money supply, what happens with
the real wage and total employment?
Doubling the money supply:
Nominal wages double
Price level doubles
Real wage is W/P remains unchanged
Quantity of labor supplied does not change
Quantity of labor demanded does not change
Total employment of labor does not change
THE NEUTRALITY OF MONEY – 2
nentraliey
Most economists believe
The classical dichotomy and neutrality of money describe the
economy in the long run.
In later chapters
We will see that monetary changes can have important
short-run effects on real variables.
QUANTITY EQUATION: THE VELOCITY OF MONEY
貨幣流通的速度 ( 貨幣轉⼿的速度)
=
The number
of
transation in
which
Velocity of money:
the average dollar is used
The rate at which money changes hands
1
Velocity formula:
O ralab
器
V
交品德 , 繼龘鮮
Notation:
P x Y = nominal GDP = (price level) x (real GDP)
M = money supply
V = velocity
.
-
: ②
oniomal
EXAMPLE 4: THE VELOCITY OF MONEY
Assume there is only one good in the economy, pizza. In 2019,
money supply is $10,000, real GDP is 3,000 pizzas and the
price of pizza is $10. What was the velocity of money?
Y = real GDP = 3,000 pizzas
P = price level = price of pizza = $10
P x Y= nominal GDP = value of pizzas = $30,000
Velocity, V = P × Y / M = nominal GDP / money supply =
$30,000/$10,000 = 3
The average dollar was used in 3 transactions.
平均⼀元可⽤來作交易 3 次
(
被使⽤幾次)
,
U.S. NOMINAL GDP, M2, AND VELOCITY 1960–2019
穩定的
Velocity is fairly stable over the long run
⼀
⼀
(
constelan
1960=100
不變的
M2
Nominal GDP
Velocity
。
THE QUANTITY EQUATION
不變
时
时
AK .
L
. NH
The quantity equation: M x V = P x 。
Y 不變
Relates the quantity of money (M) to the nominal value of
output (P × Y)
Shows that an increase in the quantity of money in an economy
must be reflected in one of the other three variables:
The price level must rise
The quantity of output must rise
Or the velocity of money must fall
THE QUANTITY THEORY OF MONEY
1.
V is relatively stable over time.
2.
A change in M does not affect Y: money is neutral, Y is real GDP
determined by technology & resources
不會被影響
3.
A change in M causes nominal GDP (P x Y) to change by
就繼動多少 PY (NominalGD
the same percentage. 回貨幣變動多少 p—
中企的
—
—
明也 動多少被影響
So, P changes by same percentage as
P x Y and M.
5.
Rapid money supply growth causes rapid inflation.
𧖣
4.
——
ACTIVE LEARNING 3: QUANTITY THEORY OF MONEY
Assume there is only one good in the economy, corn. The economy
has enough labor, capital, and land to produce 1,800 bushels of
corn.
不變的
V is constant. In 2019, money supply was $3,600 and the price
of corn was $8/bushel. For 2020, the Fed increases MS by 10%.
A. Compute the velocity of money using 2019 information.
B. Compute the 2020 values of nominal GDP and P. Compute the
inflation rate for 2019–2020.
C. Suppose tech. progress causes Y to increase to 1,950 in 2020.
Compute the 2019–2020 inflation rate.
2019
A
Y
=
V
=
202 O
B
.
M
=
MV
P
-
×
1800
.
M
=
3600 (
1
PY
3960
→
1800
3960
=
,
3600
=
器 81800
Inflation
C
M
.
.
=
%)
10
+
×
4
=
=
=
8 8
8
4
3960
NominalGDP
15840
P
15840
=
P
=
8.
( 貨幣增加 10 %
-
.
=
8
V
4
=
MV PY → 3960
=
Y
.
×
4
=
=
= .
Inflation 3
100
⼈
=
10 % # 物價也增加
1950
P
×
1950
1÷ 8
→
8
8
×
100 %
=
1
.
54 %
.
123
,
10 %
)
inflation
money growth
If real
GDP is
constant
If real
GDP is
growthrate
growing inflation
money
"
'
,
=
; Economic growthincrease number of
Money growth
is
needed
for those
rate
transations
lhtrd
transations
,
THE FISHER EFFECT – 1
Principle of monetary neutrality
An increase in the rate of money growth raises the rate of
inflation but does not affect any real variable
Because
Real interest rate = Nominal interest rate – Inflation rate
We get
π
π
A
Nominal interest rate = Real interest rate + Inflation rate
。
r
=
⼼
π
G — 由可貸資⾦市場決定
-
THE FISHER EFFECT – 2
費雪效果 名⾃利率隨物价通 ”, 率⼀对⼀調整
Fisher effect
One-for-one adjustment of nominal interest rate to inflation
rate
When the Fed increases the rate of money growth, the long-run
result is:
Higher inflation rate
Higher nominal interest rate
:
U.S. NOMINAL INTEREST & INFLATION RATES, 1960–2019
Nominal
interest rate
Inflation rate
The close relation
between these variables
is evidence for the Fisher
effect.
THE INFLATION TAX
The inflation tax
Revenue the government raises by creating (printing) money
Like a tax on everyone who holds money
When the government prints money
The price level rises
The dollars in your wallet are less valuable
In the U.S., the inflation tax today accounts for less than 3% of
total revenue