# BU ECON 362 - Chapter 5 Definitions (2 pages)

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## Chapter 5 Definitions

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## Chapter 5 Definitions

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Pages:
2
School:
Binghamton University
Course:
Econ 362 - Macroeconomic Theory (DIS)
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Chapter 5 Definition Sheet Inflation rate the percentage increase in the average level of prices Price amount of money required to buy a good Velocity the number of times the average dollar bill changes hands in a given time period Money market economists like to think that there is a market for money cash and checking account balances Money Demand M P d kY Quantity Equation M x V P x Y Seigniorage to spend more without raising taxes or selling bonds the government can print money Inflation tax printing money to raise revenue causes inflation Inflation is like a tax on people who hold money Fisher Equation I r pi Fisher Effect an increase in pi causes an equal increase in I one for one relationship Pi actual inflation rate not known until after it has occurred Pie expected inflation rate I pie ex ante real interest rate the real interest rate people expect at the time they buy a bond or take out a loan I pi ex post real interest rate the real interest rate actually realized Anticipated expected inflation everyone knows inflation will be at a certain rate Unanticipated inflation inflation that take people by surprise Shoeleather cost the costs and inconveniences of reducing money balances to avoid the inflation tax Menu costs the costs of changing prices Relative Price Distortions different firms change their prices at different times leading to relative price distortions causing microeconomic inefficiencies in the allocation of resources Unfair Tax Treatment some taxes are not adjusted to account for inflation such as the capital gains General inconvenience inflation makes it harder to compare nominal values from different time periods Hyperinflation pi 50 per month Transactions Velocity of Money the ratio of the dollar value of all transactions to the money supply Income Velocity of Money the ratio of national income as measured by GDP to the money supply Real Money Balances the quantity of money expressed in terms of the quantity of goods and services it can buy

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