Essay on Inflation and Money

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Chapter 19

Demand for money – the quantity of money that people want to hold.

Dominated assets – assets such as currencuy and checkable assets which earn lower returns than other asstets which are just as safe

Equation of exchange – the equation MV=PY, which relates nominal income to the quantity of money

Government budget constraint – the requirement that the government budget deficit equal the sum of the change in the monetary base and the change in government bonds held by the public.

Hyperinflation – an extreme inflation in which the inflation rate exceeds 50% per month.

Inflation hedges – Alternative assets whose real returns are less affected than that of money when inflation varies

Liquidity trap – a case of ultrasensitive of the demand for money to interest rates in which conventional monetary policy has no direct effect on aggregate spending because a change in the money supply has no effect on the interest rate.

Liquidity preference theory – John Maynards Keynes’s theory of the demand for money: the transactions motive, the precautionary motive, and the speculative motive.

Monetizing the debt – a method of financing government spending whereby the government debt issued to finance government spending is removed from the hands of the public and is replaced by high-powered money instead. Also called printing money.

Monetary theory – the theory that related changes in the quantitiy of money to changes in economic activity

Payment technology – moethods of payment that include credit cards and electronic payments

Printing money – synonym for monetizing money.

Quantity theory of money – the theory that nominal income is determined solely by movements in the quantity of money.

Real money balance – the quantity of money in real terms.

Velocity of money – the rate of turnover of money; the average number of times per year that a dollar is spent in buying the total amount of final goods and services produced in the economy.

Chapter 20

Aggregate demand – the total quantity of output demanded in the economy at different price levels.

Animal Spirits – Waves of optimism and pessimism that affect consumers’ and businesses’ willingness to spend.

Autonomous consumption expenditure – the amount of consumer expenditure that is independent of disposable income.

Autonomous investment – A component of planned investment spending that is completely exogenous and so is unexplained by the variables in a model.

Autonomous spending - Exogenous spending that is unrelated to variables in the model such as output or real interest rate.

Consumption expenditure - the total demand for consumer goods and services.

Consumption function – the relationship between disposable income and consumer expenditure.

Disposable income – total income available for spending, equal to aggregate income minus taxes.

Exchange rate – the price of one currency stated in terms of another currency

Exogenous – Independent of variables in the model.

Fixed investment – Spending by firms on equipment (computer, airplanes) and structures (factories, office buildings( and planned spending on residential housing.

Government purchases – Spending by all levels of government (federal, state, and local) on goods and services.

Inventory investment – Spending by firms on additional holdings of raw materials, parts, and finished goods.

IS curve – The relationship that describes the combinations of aggregate output and interest rates for which the total quantity of goods produced equals the total quantity demanded (goods market equilibrium).

Marginal propensity to consume – the slope of the consumption function line that measures the change in consumer expenditure resulting from an additional dollar of disposable income.

Net exports – Net foreign spending on domestic goods and services, equal to exports minus imports.

Planned expenditure – the total amount of spending on domestically produced goods and services that households , b8usiness, the
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