Money and Inflation

MonChapter 4: Money and Inflation

Inflation – the overall increase in prices

* Is for ongoing increase in prices, not a one-time increase; Varies over time

Hyperinflation – extraordinarily high inflation

* Chapter looks at the classical theory – assumes prices are flexible (for now ignore s-r stickiness)

* To understand inflation we must understand money

4-1 Concept of money and how gov’t plays a part in determining the quantity of public money

4-2 Shows that the Q of money det price lvl and rate of growth in Q of money det rate of inflation

4-3 Discusses the revenue that gov’t can raise by printing money (sometimes called inflation tax)

4-4 Examines how inflation affects the nominal interest rate

4-5 Discusses how nominal int rate affects Q of money people wish to hold and thus the price lvl

4-6 Is it a major social problem?

4-7 Hyperinflation

4-1 What is Money?

* Is the stock of liquid financial assets that can be readily used to make transactions

* The dollars in the hands of the public make up the nation’s stock of money

The Functions of Money

Store of Value – way to transfer purchasing power from the present to the future

* Is imperfect, if prices are rising you can buy less with that amount

Unit of Account – the terms in which prices are quoted, debts are recorded; measures econ transactions

Medium of Exchange – what we use to buy g + s

* Liquidity – the ease with which an asset can be converted into the medium of exchange

* Without money one must barter and requires the double coincidence of wants

The Types of Money

* Dollars are widely accepted as money

Fiat Money – has no intrinsic value, is established as money by the gov’t, is the norm in most economies

Commodity Money – some intrinsic value, Ex: the gold standard -> gold is used for purposes or transactions

The Development of Fiat Money

* The use of money in exchange ends up being a social convention; everyone values it bc they expect...