1.Explain the quantity theory of money. Make sure to explain the relationship between money demand, money supply, and quantity of money.
2. What is the relationship between the price level and the value of money? Which variable (s) will be affected if the money supply increases in the economy?
3. Explain any three costs associated with inflation? Also, provide a real-world example of hyperinflation that happened in the past.
https://www.youtube.com/watch?v=JcVKeVM72yw
PowerPoint Presentation 1 Principles of Macro Economics, Ninth Edition N. Gregory Mankiw N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University N. Gregory Mankiw Principles Of Macro Economics Ninth Edition 1 Chapter 30 Money Growth and Inflation 2 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inflation, Part 1 Inflation Increase in the overall level of prices Deflation Decrease in the overall level of prices Hyperinflation Extraordinarily high rate of inflation 3 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inflation, Part 2 2008 to 2018 Prices rose at an average rate of 1.5% per year The 1970s Prices rose by 7.8% per year The price level more than doubled over the decade 4 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inflation, Part 3 International data, 2018 inflation rate 2.4% in the U.S 1.2 percent in Japan 4.8 percent in Mexico 12 percent in Nigeria 15 percent in Turkey 32 percent in Argentina February 2008, Zimbabwe 24,000% (hyperinflation) 5 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Classical Theory of Inflation, Part 1 Classical theory of money Quantity theory of money Explain the long-run determinants of the price level Explain the inflation rate “So what’s it going to be? The same size as last year or the same price as last year?” 6 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Level of Prices; Value of Money Inflation Economy-wide phenomenon Concerns the value of economy’s medium of exchange Inflation: rise in the price level Lower value of money Each dollar buys a smaller quantity of goods and services 7 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Classical Theory of Inflation, Part 2 Money demand Reflects how much wealth people want to hold in liquid form Depends on Credit cards Availability of ATM machines Interest rate Average level of prices in economy Demand curve – downward sloping 8 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Money supply Determined by the Fed and the banking system Supply curve is vertical In the long run Money supply and money demand are brought into equilibrium by the overall level of prices 9 The Classical Theory of Inflation, Part 3 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 1 How the Supply and Demand for Money Determine the Equilibrium Price Level 10 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Effects of a Monetary Injection, Part 1 Economy is in equilibrium If the Fed doubles the supply of money Prints bills Drops them on market Or the Fed: open-market purchase New equilibrium Supply curve shifts right Value of money decreases Price level increases 11 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 2 An Increase in the Money Supply 12 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Effects of a Monetary Injection, Part 2 Quantity theory of money The quantity of money available in the economy determines (the value of money) the price level Growth rate in quantity of money available determines the inflation rate 13 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Adjustment process Excess supply of money Increase in demand of goods and services Price of goods and services increases Increase in price level Increase in quantity of money demanded New equilibrium 14 Effects of a Monetary Injection, Part 3 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Classical Dichotomy, Part 1 Nominal variables Variables measured in monetary units Dollar prices Real variables Variables measured in physical units Relative prices, real wages, real interest rate Classical dichotomy Theoretical separation of nominal and real variables 15 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Classical Dichotomy, Part 2 Developments in the monetary system Influence nominal variables Irrelevant for explaining real variables Monetary neutrality Changes in money supply don’t affect real variables Not completely realistic in short-run Correct in the long run 16 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Velocity and the Quantity Equation, Part 1 Velocity of money (V) Rate at which money changes hands V = (P × Y) / M P = price level (GDP deflator) Y = real GDP M = quantity of money 17 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Velocity and the Quantity Equation, Part 2 Quantity equation: M × V = P × Y Quantity of money (M) Velocity of money (V) Dollar value of the economy’s output of goods and services (P × Y ) Shows: an increase in quantity of money Must be reflected in: Price level must rise Quantity of output must rise Velocity of money must fall 18 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 3 Nominal GDP, the Quantity of Money, and the Velocity of Money 19 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Quantity Theory of Money, Part 1 Velocity of money Relatively stable over time Changes in quantity of money, M Proportionate changes in nominal value of output (P × Y) Economy’s output of goods & services, Y Primarily determined by factor supplies And available production technology Money does not affect output 20 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Quantity Theory of Money, Part 2 Change in money supply, M Induces proportional changes in the nominal value of output (P × Y) Reflected in changes in the price level (P) When the central bank increases the money supply rapidly High rate of inflation 21 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Money and Prices during Four Hyperinflations, Part 1 Hyperinflation Inflation that exceeds 50% per month The price level increases more than a hundredfold over the course of a year Data on hyperinflation Clear link between quantity of money and the price level 22 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Money and Prices during Four Hyperinflations, Part 2 Four classic hyperinflation, 1920s Austria, Hungary, Germany, and Poland Slope of the money line Rate at which the quantity of money was growing Slope of the price line: inflation rate The steeper the lines: the higher the rates of money growth or inflation Prices rise when the government prints too much money 23 N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 4 Money and Prices during Four Hyperinflations (a) Austria This figure shows the quantity of money and the price level during four hyperinflations. (Note that these variables are graphed on logarithmic scales. This means that equal vertical distances on the graph represent equal percentage changes in the variable.) In each case, the quantity of money and the price level move closely together. The strong association between these two variables is consistent with the quantity theory of money, which states that growth in the money supply