1
Principles of Economics	
Chapter30	
	
Monetary
Growth and
Inflation
2
Relative Chapter	
•  PattⅧ The data of macroeconomics	
–  24 Measuring the cost of living	
•  PartⅨ The real economy in ...
3
What is inflation?
4
Much Money?
5
Grapha?
6
7
Today's Theme	
•  What determines whether an economy experiences
inflation and ,if so, how much?	
•  Why is inflation a ...
8
What is inflation?
9
Index	
•  The classic theory of inflation	
•  The costs of inflation
10
Index	
•  The classic thory of inflation	
•  The costs of inflation
11
The classic theory of Inflation	
•  Supply	
–  simply the quantity of money supplied as a policy
variables that Fed con...
12
Figure 1 Money Supply, Money Demand,
and the Equilibrium Price Level
Quantity of
Money
Value of
Money, 1/P
Price
Level,...
13
Figure 1 Money Supply, Money Demand,
and the Equilibrium Price Level
Quantity of
Money
Value of
Money, 1/P
Price
Level,...
14
The quantity theory of money	
•  Quantity theory of money	
–  a theory asseting that the quantity of money available
de...
15
Figure 2 The Effects of Monetary Injection
Quantity of
Money
Value of
Money, 1/P
Price
Level, P
Money
demand
0
1
(Low)
...
16
Caution!

regarding money supply	
•  When the Fed buys government bonds,it pays out dollars
and expands the money suppl...
17
Transmission mechanism of monetary policy	
オペレーション	
中央銀行当座預金	
オーバーナイト金利	
貸出供給	
 資産価格	
 為替レート	
担保価格	
総支出	
予想物価上昇率	
中長期金利...
18
A brief look at the adjustment 

process	
•  The economy's output of goods and services is
determined by the available ...
19
The classis dichotomy and 

monetary neutrality	
•  Classical dichotomy	
– the theoretical separation of nominal and re...
20
Velocity and the quantity eqation	
YPM ×=×V
V= velocity	
P= the price level	
Y= the quantity of output	
M= the quantity...
21
Figure 3 Nominal GDP, the Quantity of Money, and
the Velocity of Money
Indexes
(1960 = 100)
2,000
1,000
500
0
1,500
Nom...
22
the Equilibrium Price Level, Inflation Rate, and
the Quantity Theory of Money 	
1.  The velocity of money is relatively...
23
the inflation tax 	
•  Inflation tax	
–  the government raises revenue by printing money	
•  The massive increases in t...
24
Fisher effect	
•  Fisher effect	
–  the one-for-one adjustment of the nominal interest rate
to the inflation rate.	
•  ...
25
Figure 5
The Nominal Interest Rate and the Inflation Rate
Percent
(per year)
1960 1965 1970 1975 1980 1985 1990 1995 20...
26
Index	
•  The classic thory of inflation	
•  The costs of inflation
27
Economists have identified
six costs of inflation
•  Shoeleather costs
•  Menu costs
•  Increased variability of relati...
28
The costs of inflation 	
•  Shoeleather Costs	
–  the resources wasted when inflation encourages people
to reduce their...
29
Inflation-induced tax distortions	
EconomyA	
(Price stability)	
EconomyB	
(Inflation)	
Real interest rate	
 4%	
 4%	
In...
30
Confusion and Inconvenience
•  When the Fed increases the money supply and
creates inflation, it erodes the real value ...
31
A special cost of unexpected inflation

Arbitrary redsistributions of wealth	
•  Unexpected inflation redistributes wea...
32
Deflation may be worse	
•  Friedman rule	
–  Some economists have suggested that a small and
predictable amount of defl...
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20120527 mankiw economics chapter30

  1. 1. 1 Principles of Economics Chapter30 Monetary Growth and Inflation
  2. 2. 2 Relative Chapter •  PattⅧ The data of macroeconomics –  24 Measuring the cost of living •  PartⅨ The real economy in the long run –  26 Saving,Investment,and the financial sytem •  PartⅩ Money and prices in the long run –  29 The monetary system –  30 Money growth and inflation
  3. 3. 3 What is inflation?
  4. 4. 4 Much Money?
  5. 5. 5 Grapha?
  6. 6. 6
  7. 7. 7 Today's Theme •  What determines whether an economy experiences inflation and ,if so, how much? •  Why is inflation a problem? •  What are the costs of that inflationimposes on a socety?
  8. 8. 8 What is inflation?
  9. 9. 9 Index •  The classic theory of inflation •  The costs of inflation
  10. 10. 10 Index •  The classic thory of inflation •  The costs of inflation
  11. 11. 11 The classic theory of Inflation •  Supply –  simply the quantity of money supplied as a policy variables that Fed controls. •  Demand –  how much wealth people want to hold in liquid form. –  the average levels of prices (a higher price level increases the quantity of money demand) Supply and Demand detemines the value of money
  12. 12. 12 Figure 1 Money Supply, Money Demand, and the Equilibrium Price Level Quantity of Money Value of Money, 1/P Price Level,P Quantity fixed by the Fed Money supply 0 1 (Low) (High) (High) (Low) 1 /2 1 /4 3 /4 1 1.33 2 4 Equilibrium value of money Equilibrium price level Money demand A In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply.
  13. 13. 13 Figure 1 Money Supply, Money Demand, and the Equilibrium Price Level Quantity of Money Value of Money, 1/P Price Level,P Quantity fixed by the Fed Money supply 0 1 (Low) (High) (High) (Low) 1 /2 1 /4 3 /4 1 1.33 2 4 Equilibrium value of money Equilibrium price level Money demand A In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply.
  14. 14. 14 The quantity theory of money •  Quantity theory of money –  a theory asseting 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. •  "Inflation is always and everywhere a monetary phoenomenon"
  15. 15. 15 Figure 2 The Effects of Monetary Injection Quantity of Money Value of Money, 1/P Price Level, P Money demand 0 1 (Low) (High) (High) (Low) 1 /2 1 /4 3 /4 1 1.33 2 4 M1 MS1 M2 MS2 2. . . . decreases the value of money . . . 3. . . . and increases the price level. 1. An increase in the money supply . . . A B
  16. 16. 16 Caution!
 regarding money supply •  When the Fed buys government bonds,it pays out dollars and expands the money supply. •  If any of these dollars are deposited inbanks which hold some as reserves and loan out the rest,the money multiplier swings into action. •  In this chapter, we ignore the complications introduced by the banking system.
  17. 17. 17 Transmission mechanism of monetary policy オペレーション 中央銀行当座預金 オーバーナイト金利 貸出供給 資産価格 為替レート 担保価格 総支出 予想物価上昇率 中長期金利 実質長中長期金利 相対資産価格 金利チャネル 信用チャネル 為替チャネル マネタリストチャネル 量的緩和チャネル
  18. 18. 18 A brief look at the adjustment 
 process •  The economy's output of goods and services is determined by the available labor,physical capital,human capital,natural resources and technological knowledge. •  The injection of money alter none of these.
  19. 19. 19 The classis dichotomy and 
 monetary neutrality •  Classical dichotomy – the theoretical separation of nominal and real variables •  Monetary neutrality – the proposition that changes in the money supply do not affect real variables.
  20. 20. 20 Velocity and the quantity eqation YPM ×=×V V= velocity P= the price level Y= the quantity of output M= the quantity of money
  21. 21. 21 Figure 3 Nominal GDP, the Quantity of Money, and the Velocity of Money Indexes (1960 = 100) 2,000 1,000 500 0 1,500 Nominal GDP Velocity M2 The velocity of money has not changed dramatically.
  22. 22. 22 the Equilibrium Price Level, Inflation Rate, and the Quantity Theory of Money 1.  The velocity of money is relatively stable over time. 2.  When the Fed changes the quantity of money, it causes proportionate changes in the nominal value of output (P × Y). 3.  Money is neutral, money does not affect output. 4.  With Y determined by factor supplied and technology,when the central bank alters M and induces proportional changes in the nominal value of output(P×Y),these are reflected in changes in P 5.  When the central bank increase the money supply rapidly,the result is a high rate of inflation.
  23. 23. 23 the inflation tax •  Inflation tax –  the government raises revenue by printing money •  The massive increases in the quantity of money lead to massive inflation. •  The inflation ends when the government institutes fiscal reforms that eliminate the need for the inflation tax.
  24. 24. 24 Fisher effect •  Fisher effect –  the one-for-one adjustment of the nominal interest rate to the inflation rate. •  The Fisher effect has maintained a long-run perspective and need not hold in the short run because inflation may be unanticipated. Nominal interest rate =Real interest rate + Inflation rate
  25. 25. 25 Figure 5 The Nominal Interest Rate and the Inflation Rate Percent (per year) 1960 1965 1970 1975 1980 1985 1990 1995 2000 0 3 6 9 12 15 Inflation Nominal interest rate
  26. 26. 26 Index •  The classic thory of inflation •  The costs of inflation
  27. 27. 27 Economists have identified six costs of inflation •  Shoeleather costs •  Menu costs •  Increased variability of relative prices •  Unintended tax liability changes •  Confusion and inconvenience •  Arbitrary redistributions of wealth
  28. 28. 28 The costs of inflation •  Shoeleather Costs –  the resources wasted when inflation encourages people to reduce their money holdings •  Menu Cost –  the cost of changing prices •  Relative-price variability and the misallocation of resources –  When inflation distorts relative prices,consumer decisions are distorted, and markets are less able to allocate resources to their best use.
  29. 29. 29 Inflation-induced tax distortions EconomyA (Price stability) EconomyB (Inflation) Real interest rate 4% 4% Inflation rate 0 8% Nominal interest rate (real interest rate+ inflation rate) 4 12 Reduced interest due to 25% tax (0.25 ×nominal interest rate) 1 3 After-tax nominal interest rate (0.75 ×nominal interest rate) 3 9 After-tax real interest rate (after-tax nominal interest rate-inflation rate) 3 1 More complete indexation would be desirable,but it would further complicate a tax code that many people already consider too complex.
  30. 30. 30 Confusion and Inconvenience •  When the Fed increases the money supply and creates inflation, it erodes the real value of the unit of account. •  Inflation causes dollars at different times to have different real values. •  Therefore, with rising prices, it is more difficult to compare real revenues, costs, and profits over time.
  31. 31. 31 A special cost of unexpected inflation
 Arbitrary redsistributions of wealth •  Unexpected inflation redistributes wealth among the population in a way that has nothing to do with either merit or need. •  There are no known examples of economies with high,stable inflation. •  If a country pursue a high-inflation monetary policy –  the costs of high expected inflation –  the arbitary redistributions of wealth associated with unexpected inflation
  32. 32. 32 Deflation may be worse •  Friedman rule –  Some economists have suggested that a small and predictable amount of deflation may be desirable. •  The costs of deflation –  Some of these mirror the costs of inflation –  Delfation often arises because of broader macro economic difficulties.
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