Chapter30MoneyGrowthandInflationPrinciplesof.pdfVIP

Chapter 30: Money Growth and Inflation Principles of Economics, 7th Edition N. Gregory Mankiw Page 1 1. Introduction a. Inflation is a sustained increase in the average level of prices. b. An increase in the price of a particular good (oil) is probably not inflationary when all other goods are taken into consideration. c. If we only have a certain amount to spend and the price and the amount that we are spending on oil goes up, then we have less to spend on everything else and their prices would be expected to fall. i. There probably is little effect on the average level of prices. d. So what causes inflation: that is the story below. e. The increase in the overall level of prices is called inflation. f. The decrease in the overall level of prices is deflation. g. Remember the Principle that prices rise when the government prints too much money. 2. The Classical Theory of Inflation a. This theory is called classical because it was developed by some of the earliest thinkers about economic issues. b. This is a long term view of the economy. c. The Level of Prices and the Value of Money i. While we think in terms of inflation being an increase in the level of prices, it is also an erosion in the purchasing power of money. d. Money Supply, Money Demand, and Monetary Equilibrium i. The value of money is based on supply and demand. ii. The Fed controls the money supply and since it is not influenced by the price level it is vertical. iii. The demand for money is negatively related to its value, so that when its value is high you need less of it to buy things. (1) It is positively related to the price level, so that you need