0
Chapter 31
!
Money Growth and
Inflation
12.95 August 2012
15.25 April 2014
17.8% increase
CPI	

GDP Deflator
Measuring Inflation
Year
General
Index
Food and
non -
alcoholic
beverages
Tobacco
Clothing and
Footwear
Housing ,
Water,
Electricity,
Gas, and...
Inflation
COUNTRY RATE
Saudi Arabia	

 2.8%
United States 1.1%
Venezuela	

 57.3%
Japan 1.5%
Egypt	

 9.8%
Russia	

 6.2%
S...
Inflation
Source:Trading Economics April 2014
-15%
0%
15%
30%
45%
60%
Saudi Arabia United States Venezuela Japan Egypt Russ...
What determines the
value of money?
supply and demand
David Hume	

1711-1776	

!
!
dichotomy	

“split in two”	

!
nominal vs. real
measured in monetary
units
Nominal variable
measured in physical
units
Real variable
different effects
Short Run	

vs.	

Long Run
Milton Friedman	

1912-2006	

!
!
Quantity
Theory of
Money
Quantity Theory of Money
M x V = P x Y	

M = Money	

V =Velocity	

P = Prices	

Y = Output
Quantity Theory of Money
MV = PY	

AssumeV is constant	

then an increase in M will
only increase P orY
Quantity Theory of Money
MV = PY	

Increasing M will either
increase prices or output
or both
Quantity Theory of Money
1. V is constant	

2. Change M will change P xY	

3. Y is a function of capital	

4. If M is incr...
Government Spending
tax	

borrow	

print
Inflation Tax
When government prints
too much money is
becomes less valuable.	

Anyone who has money
has lost value
Real vs. Nominal
Real Interest Rate =	

Nominal Rate + Inflation
Rate	

!
R = N + I
Real vs. Nominal
Real = Nominal - Inflation	

!
Nominal = Real + Inflation	

!
Inflation = Nominal - Real	

!
Indexing
Adjusting nominal rate for
inflation
Year
NOMINAL
OIL PRICE
REAL OIL
PRICE
Base Year 2005
1970 1.30 5.35 411.5%
1971 1.65 6.46 391.5%
1972 1.90 7.13 375.3%
197...
0
25
50
75
100
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20...
Three Tools 	

of Central Banks
Open-Market Operations	

Discount Rate	

Reserve Ratio
What did SAMA do to
fight the financial crisis in
2008?
Dropped the ORR from 5.5%
to 2.0%
Dropped the Reserve Ratio
from 13 ...
SAMA Official Repo Rate
Dropped from	

5.5% October 2008	

to 2.0% by January 2009	

3 month period of
global financial cris...
Inflation Deflation
Winners Borrowers Lenders
Losers Lenders Borrowers
Eco 202 ch 31 money growth and inflation
Eco 202 ch 31 money growth and inflation
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Transcript of "Eco 202 ch 31 money growth and inflation"

  1. 1. Chapter 31 ! Money Growth and Inflation
  2. 2. 12.95 August 2012 15.25 April 2014 17.8% increase
  3. 3. CPI GDP Deflator Measuring Inflation
  4. 4. Year General Index Food and non - alcoholic beverages Tobacco Clothing and Footwear Housing , Water, Electricity, Gas, and other fuels Furnishings, household equipment & Routine household maintenance Health Transport Communi- cation Recreation and Culture Education Restaurants and Hotels Miscellaneou s goods and services 2007 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2008 106.1 113.7 105.1 101.0 108.5 103.2 103.2 97.0 98.1 97.7 110.3 103.2 101.6 2009 110.5 116.4 107.3 101.6 120.1 105.6 103.2 98.2 98.2 99.2 111.8 110.0 104.9 2010 114.7 120.8 119.2 101.1 129.2 107.0 103.3 99.7 97.7 97.2 113.2 113.8 110.1 2011 119.0 127.1 126.7 99.7 143.9 115.5 103.4 103.1 92.0 104.7 108.7 117.0 113.9 2012 122.4 132.9 141.3 103.3 148.7 117.5 105.6 108.3 92.1 104.5 110.2 121.7 117.8 % Chg 2.9% 4.6% 11.5% 3.6% 3.3% 1.7% 2.1% 5.0% 0.1% -0.2% 1.4% 4.0% 3.4%
  5. 5. Inflation COUNTRY RATE Saudi Arabia 2.8% United States 1.1% Venezuela 57.3% Japan 1.5% Egypt 9.8% Russia 6.2% Spain -0.2% UAE 1.8% Greece -1.1% Iran 28.8% Syria 49.5% Source:Trading Economics April 2014
  6. 6. Inflation Source:Trading Economics April 2014 -15% 0% 15% 30% 45% 60% Saudi Arabia United States Venezuela Japan Egypt Russia Spain UAE Greece Iran Syria
  7. 7. What determines the value of money? supply and demand
  8. 8. David Hume 1711-1776 ! ! dichotomy “split in two” ! nominal vs. real
  9. 9. measured in monetary units Nominal variable
  10. 10. measured in physical units Real variable
  11. 11. different effects Short Run vs. Long Run
  12. 12. Milton Friedman 1912-2006 ! ! Quantity Theory of Money
  13. 13. Quantity Theory of Money M x V = P x Y M = Money V =Velocity P = Prices Y = Output
  14. 14. Quantity Theory of Money MV = PY AssumeV is constant then an increase in M will only increase P orY
  15. 15. Quantity Theory of Money MV = PY Increasing M will either increase prices or output or both
  16. 16. Quantity Theory of Money 1. V is constant 2. Change M will change P xY 3. Y is a function of capital 4. If M is increased then P is increased 5. Therefore increasing M will increase inflation
  17. 17. Government Spending tax borrow print
  18. 18. Inflation Tax When government prints too much money is becomes less valuable. Anyone who has money has lost value
  19. 19. Real vs. Nominal Real Interest Rate = Nominal Rate + Inflation Rate ! R = N + I
  20. 20. Real vs. Nominal Real = Nominal - Inflation ! Nominal = Real + Inflation ! Inflation = Nominal - Real !
  21. 21. Indexing Adjusting nominal rate for inflation
  22. 22. Year NOMINAL OIL PRICE REAL OIL PRICE Base Year 2005 1970 1.30 5.35 411.5% 1971 1.65 6.46 391.5% 1972 1.90 7.13 375.3% 1973 2.70 9.61 355.9% 1974 9.76 31.83 326.1% 1975 10.72 31.94 297.9% 1976 11.51 32.43 281.8% 1977 12.40 32.85 264.9% 1978 12.70 31.44 247.6% 1979 17.26 39.44 228.5% 1980 28.67 59.99 209.2% 1981 34.23 65.49 191.3% 1982 31.74 57.23 180.3% 1983 28.77 49.90 173.4% 1984 28.06 46.91 167.2% 1985 27.54 44.69 162.3% 1986 13.73 21.80 158.8% 1987 17.23 26.58 154.3% 1988 13.40 19.99 149.2% 1989 16.21 23.30 143.7% 1990 20.82 28.81 138.4% 1991 17.43 23.29 133.6% 1992 17.94 23.42 130.5% 1993 15.68 20.03 127.7% 1994 15.39 19.25 125.1% 1995 16.73 20.50 122.5% 1996 19.91 23.94 120.2% 1997 18.71 22.11 118.2% 1998 12.20 14.26 116.9% 1999 17.45 20.09 115.1% 2000 26.81 30.22 112.7% 2001 23.06 25.42 110.2% 2002 24.32 26.38 108.5% 2003 27.69 29.42 106.2% 2004 34.53 35.68 103.3% 2005 50.15 50.15 100.0% 2006 61.05 59.14 96.9% 2007 68.75 64.72 94.1% 2008 95.16 87.64 92.1% 2009 61.38 56.04 91.3% 2010 77.75 70.05 90.1% 2011 107.80 95.10 88.2% 2012 110.27 95.72 86.8%
  23. 23. 0 25 50 75 100 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Real Oil Price Base year 2005
  24. 24. Three Tools of Central Banks Open-Market Operations Discount Rate Reserve Ratio
  25. 25. What did SAMA do to fight the financial crisis in 2008? Dropped the ORR from 5.5% to 2.0% Dropped the Reserve Ratio from 13 percent to 7 percent
  26. 26. SAMA Official Repo Rate Dropped from 5.5% October 2008 to 2.0% by January 2009 3 month period of global financial crisis Rate increased as economy heated up
  27. 27. Inflation Deflation Winners Borrowers Lenders Losers Lenders Borrowers
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