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to Accompany macroeconomics, 5th ed.
N. Gregory Mankiw
CHAPTER FOUR
Money and Inflation
Chapter Four
ruilmiddel
rekenmiddel
oppotmiddel
Geld
Geld noodzakelijk voor specialisatie
Chapter Four
Chapter Four
Fiduciair (fiat) geld: heeft geen intrinsieke
Waarde, maar moet het hebben van vertrouwen
Goederen geld: geld met intrinsieke waarde
Voorbeeld: gouden standaard
Chapter Four
De maatschappelijke geldhoeveelheid (M1):
1. Chartaal geld, de hoeveelheid munt en papiergeld in handen van het
publiek
2. Giraal geld: direct opeisbare vorderingen op geldscheppende
instelling
binnenlandse liquiditeitenmassa M3 :
M1 + Brede geldhoeveelheid die bestaat uit chartaal en giraal geld,
deposito’s en substituten van deposito’s.
Toelichting:
Deposito’s met een looptijd tot en met twee jaar
enChapter
met Four
een opzegtermijn tot en met drie maanden.
• Open marktbeleid:
Kopen verkopen van waardepapieren (swaps).
• Veranderingen rente (disconto)
• geldmarktkasreserveregeling
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Definitievergelijking
Money  Velocity = Price  Output
M 
V
= P  Y
De V is cruciaal: omloopsnelheid van het geld
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Relatie geldvraag en fischer (blz 103):
M/P is de reele geldhoeveelheid (real money balances)
Vraagfunctie van geld dat mensen willen aanhouden is (fischer anders
geschreven:
Md = k Y*P
Mensen willen een bepaald deel (k) van hun nominaal inkomen
aanhouden (Y*P) aanhouden. De reele vraag wordt dan:
(M/P)d = k Y
Chapter Four
The money demand function is like the demand function for a
particular good. Here the “good” is the convenience of holding real
money balances. Higher income leads to a greater demand for real
money balances. The money demand equation offers another way to
view the quantity equation (MV= PY) where V = 1/k.
This shows the link between the demand for money and the velocity
of money. When people hold a lot of money for each dollar of
income (k is large), money changes hands infrequently (V is small).
Conversely, when people want to hold only a little money (k is
Chapter Four
small), money changes hands frequently (V is large). In other
The Assumption of Constant Velocity
The quantity equation can be viewed as a definition:
it defines velocity V as the ratio of nominal GDP, PY,
to the quantity of money M. But, if we make the
assumption that the velocity of money is constant,
then the quantity equation MV=PY becomes a useful
theory of the effects of money.
MV = PY
Chapter Four
So, let’s hold it constant!
Three building blocks that determine the economy’s overall level
of prices:
1) The factors of production and the production function determine
the level of output Y.
2) The money supply determines the nominal value of output, PY.
This follows from the quantity equation and the assumption that
the velocity of money is fixed.
3) Chapter
The Four
price level P is then the ratio of the nominal value of output,
In other words, if Y is fixed (from Chapter 3) because it depends
on the growth in the factors of production and on technological
progress, and we just made the assumption that velocity is constant,
MV = PY
or in percentage change form:
% Change in M + % Change in V = % Change in P + % Change in Y
if V is fixed and Y is fixed, then it reveals that % Change in M is what
induces % Changes in P.
The quantity theory of money states that the central bank, which
controls the money supply, has the ultimate control over the inflation
rate. If the central bank keeps the money supply stable,the price level
willChapter
be stable.
If the central bank increases the money supply rapidly,
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The revenue raised through the printing of money is called
seigniorage. When the government prints money to finance
expenditure, it increases the money supply. The increase in
the money supply, in turn, causes inflation. Printing money to
raise revenue is like imposing an inflation tax.
Chapter Four
Chapter Four
Economists call the interest rate that the bank pays the nominal
interest rate and the increase in your purchasing power the
real interest rate.
r=i–p
This shows the relationship between the nominal interest rate
and the rate of inflation, where r is real interest rate, i is the
nominal interest rate and p is the rate of inflation, and remember
Chapter Four
that p is simply the percentage change of the price level P.
The Fisher Equation illuminates the distinction between
the real and nominal rate of interest.
Fisher Equation: i = r + p
The one-to-one relationship
between the inflation rate and
the nominal interest rate is
the Fisher Effect.
Actual (Market)
Real rate
Inflation
Nominal rate of
of interest
interest
It shows that the nominal interest can change for two reasons: because
theChapter
real Four
interest rate changes or because the inflation rate changes.
The quantity theory and the Fisher equation together tell us how money
growth affects the nominal interest rate. According to the quantity
theory, an increase in the rate of money growth of one percent causes a
1% increase in the rate of inflation.
According to the Fisher equation, a 1% increase in the rate of inflation
in turn causes a 1% increase in the nominal interest rates.
Here is the exact link between our two familiar equations: The quantity
% Change in M + % Change in V = % Change in P + % Change in Y
equation in percentage change form and the Fisher equation.
% Change in M + % Change in V =
p
+ % Change in Y
i=r+ p
Chapter Four
The real interest rate the borrower and lender expect when a loan is
made is called the ex ante real interest rate. The real interest
rate that is actually realized is called the ex post real interest rate.
Although borrowers and lenders cannot predict future inflation with
certainty, they do have some expectation of the inflation rate. Let p
denote actual future inflation and pe the expectation of future inflation.
The ex ante real interest rate is i - pe, and the ex post real interest rate is
i - p. The two interest rates differ when actual inflation p differs from
expected inflation pe.
HowChapter
does
this distinction modify the Fisher effect? Clearly the nominal
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i=r+
e
p
The ex ante real interest rate r is determined by equilibrium in the
market for goods and services, as described by the model in
Chapter 3. The nominal interest rate i moves one-for-one with
changes in expected inflation pe.
Chapter Four
The quantity theory (MV = PY) is based on a simple money demand
function: it assumes that the demand for real money balances is
proportional to income. But, we need another determinant of the
quantity of money demanded– the nominal interest rate.
The nominal interest rate is the opportunity cost of holding money:
it is what you give up by holding money instead of bonds. So, the new
general money demand function can be written as:
(M/P)d = L(i, Y)
This equation states that the demand for the liquidity of real money
Chapter Four
balances
is a function of income (Y) and the nominal interest rate (i).
The inconvenience of reducing money
holding is metaphorically called the
shoe-leather cost of inflation, because
walking to the bank more often induces
one’s shoes to wear out more quickly.
When changes in inflation require printing
and distributing new pricing information,
then, these costs are called menu costs.
Chapter Four
Another cost is related to tax laws. Often
Unanticipated inflation is unfavorable because it arbitrarily
redistributes wealth among individuals.
For example, it hurts individuals on fixed pensions. Often these
contracts were not created in real terms by being indexed to a
particular measure of the price level.
There is a benefit of inflation– many economists say that some
inflation may make labor markets work better. They say it
Chapter
Four the wheels” of labor markets.
“greases
Hyperinflation is defined as inflation that exceeds
50 percent per month, which is just over 1% a day.
Chapter Four
Costs such as shoe-leather and menu costs are much
worse with hyperinflation– and tax systems are
grossly distorted. Eventually, when costs become too
great with hyperinflation, the money loses its role as
store of value, unit of account and medium of
Economists call the separation of the determinants of real
and nominal variables the classical dichotomy. It suggests
that changes in the money supply do not influence real
variables.
This irrelevance of money for real variables is called
monetary neutrality. For the purpose of studying long-run
issues-- monetary neutrality is approximately correct.
Chapter Four
Inflation
Hyperinflation
Money
Store of value
Unit of account
Medium of exchange
Fiat money
Commodity money
Gold Standard
Money supply
Monetary
Chapter Four policy
Central Bank
Federal Reserve
Open-market operations
Currency
Demand deposits
Quantity equation
Transactions velocity
of money
Income velocity
of money
Real money balances
Seigniorage
Nominal and
real interest rates
Fisher equation
Fisher effect
Ex ante and ex post
real interest rates
Shoeleather costs
Menu costs
Real and nominal
variables