A FAllIN PURCHASING POWER? THE INFLATION FALlACY

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A FAlliN PURCHASING POWER? THE INFLATION FALlACY If you ask the typical person why inflation is bad, he will tell you that the answer is obvious: Inflation robs him of the purchasing power of his hard-earned dollars. When prices rise, each dollar of income buys fewer goods and services. Thus, it might seem that inflation directly lowers […]

THE COSTS OF INFLATION

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THE COSTS OF INFLATION In the late 1970s, when the U.S. inflation rate reached about 10 percent per year, inflation dominated debates over economic policy. And even though inflation has been low over the past decade, it remains a closely watched macroeconomic variable. One study found that inflation is the economic term mentioned most often in U.S. newspapers […]

In The News

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In The News The German Hyperinflation The German experience between the two world wars remains one of history’s most vivid examples of hyperinflation and its horrific consequences. Loads of Money For these ten marks I sold my virtue,” were the words a Berliner noticed written on a banknote in 1923. He was buying a box of matches, […]

THE FISHER EFFECT

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THE FISHER EFFECT According to the principle of monetary neutrality, an increase in the rate of money growth raises the rate of inflation but does not affect any real variable. An important application of this principle concerns the effect of money on interest rates. Interest rates are important variables for macro economists to understand because (they link the […]

CASE STUDY

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CASE STUDY MONEY AND PRICES DURING FOUR HYPERINFlATIONS Although earthquakes can wreak havoc on a society, they have the beneficial by-product of providing much useful data for seismologists. These data can shed light on alternative theories and, thereby, help society predict and deal with future threats. Similarly, hyperinflation offer monetary economists a natural experiment they CC1.il use to […]

THE CLASSICAL DICHOTOMY AND MONETARY NEUTRAUTY

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THE CLASSICAL DICHOTOMY AND MONETARY NEUTRAUTY We have seen how changes in the money supply lead to changes in the average level of prices of goods and services. How do monetary changes affect other economic variables, such as production, employment, real wages, and”real interest rates? This question has long intrigued economists, including David Hume in the 18th century. […]

VELOCITY AND THE QUANTITY EQUATION

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VELOCITY  AND THE QUANTITY EQUATION We can obtain another perspective on the quantity theory of money by considering the following question: How many times per year is the typical dollar bill used to pay for a newly produced good or service? The answer to this question is given by a variable called the velocity of money. In […]

A BRIEF LOOK AT THE ADJUSTMENT PROCESS

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A BRIEF LOOK AT THE ADJUSTMENT PROCESS So far, we have compared the old equilibrium and the new equilibrium after an injection of money. How does the economy get from the old to the new equilibrium? A complete answer to this question requires an understanding of short-run fluctuations in the economy, which we examine later in this […]

THE EFFECTS OF A MONETARY INJECTION

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THE EFFECTS OF A MONETARY INJECTION Let’s now consider the effects of a change in monetary policy. To do so, imagine that the economy is in equilibrium and then, suddenly, the Fed doubles the supply of money by printing some dollar bills and dropping them around the country from helicopters. (Or less dramatically and more realistically, the […]