宏觀經(jīng)濟管理學與財務知識分析（英文版）課件

CHAPTER8Money,Prices,andInflation1Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.CHAPTER8Money,Prices,andInQuestionsWhatdoeconomistsmeanby“money”?Whyismoneyuseful?Whatdoeconomistsmeanwhentheysaythatmoneyisaunitofaccount?Whatdeterminesthepricelevelandtheinflationrate?2Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.QuestionsWhatdoeconomistsmeQuestionsWhywouldagovernmentevergenerate“hyperinflation”?Whatdeterminesthelevelofmoneydemand?Whatdeterminesthelevelofthemoneysupply?Whyisinflationseenassomethingtobeavoided?3Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.QuestionsWhywouldagovernmenInflationInthe1970s,theUnitedStatesexperiencedanepisodeofrelativelymildinflationpricesrosebetweenfiveandtenpercentperyearcausedsignificanteconomicandpoliticaltraumaavoidingarepeatoftheinflationofthe1970sremainsamajorgoalofeconomicpolicy4Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationInthe1970s,theUniFigure8.1-Post-WorldWarIIInflationintheUnitedStates,1951-20005Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.1-Post-WorldWarIITheFlexible-PriceModelTheClassicaldichotomyimpliesthatrealvariables(realGDP,realinvestmentspending,ortherealexchangerate)canbeanalyzedandcalculatedwithoutconsideringnominalvariables(pricelevel)moneyis“neutral”Thisisaspecialfeatureofthefull-employmentflexible-pricemodel6Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheFlexible-PriceModelTheClMoneyiswealththatisheldinareadily-spendableformismadeupofcoinandcurrencycheckingaccountbalancesotherassetsthatcanbeturnedintocashordemanddepositsnearlyinstantaneously,withoutriskorcost7Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyiswealththatisheldinTheUsefulnessofMoneyWithoutmoney,markettransactionswouldhavetobeperformedthroughbarterInabartereconomy,marketexchangewouldrequirethecoincidenceofwantsyouwouldhavetohavesomegoodorservicethatsomeonewantsandheorshewouldhavetohavesomegoodorservicethatyouwant8Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheUsefulnessofMoneyWithoutFigure8.2-CoincidenceofWants9Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.2-CoincidenceofWaTheUsefulnessofMoneyMoneyalsoservesasaunitofaccountmoneyisusedasayardsticktomeasurevalueorquotepricesAnythingthatalterstherealvalueofmoneyintermsofitspurchasingpowerwillalsoaltertherealtermsofexistingcontractsthatusethemoneyasaunitofaccount10Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheUsefulnessofMoneyMoneyaTheDemandforMoneyBusinessesandhouseholdshaveademandformoneytheywanttoholdacertainamountofwealthintheformofreadily-spendablepurchasingpowertocarryouttransactionsahigherlevelofspendingmeansalargermoneydemandThereisacostofholdingmoneycashandcheckingdepositsearnlittleornointerest11Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheDemandforMoneyBusinessesFigure8.3-ReasonsforandOpportunityCostofHoldingMoney12Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.3-ReasonsforandOTheQuantityTheoryofMoneyassumesthattheonlyimportantdeterminantofthedemandformoneyistheflowofspendingcanbesummarizedusingtheCambridgemoney-demandfunctionthequantityequation13Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheQuantityTheoryofMoneyasTheQuantityTheoryofMoney(PY)representsthetotalnominalflowofspendingMisthequantityofmoneyVisameasureofhowfastmoneymovesthroughtheeconomyhowmanytimestheaverageunitofmoneyisusedtobuyafinalgoodorservice14Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheQuantityTheoryofMoney(PFigure8.4-TheVelocityofMoney15Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.4-TheVelocityofMDeterminingthePriceLevelIntheflexible-pricemodelofthemacroeconomyrealGDP(Y)isequaltopotentialGDP(Y*)thevelocityofmoneyisdeterminedbythesophisticationofthebankingsystemthemoneysupplyisdeterminedbythecentralbank16Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelInDeterminingthePriceLevelIfthepricelevelishigherthanthequantityequationpredictshouseholdsandbusinesseswillhavelesswealthintheformofmoneythantheywishtheywillcutbackonpurchasessellerswillnotedemandisweakandlowerprices17Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelIfDeterminingthePriceLevelIfthepricelevelislowerthanthequantityequationpredictshouseholdsandbusinesseswillhavemorewealthintheformofmoneythantheywishtheywillincreasepurchasessellerswillnotedemandisstrongandraiseprices18Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelIfDeterminingthePriceLevelExample(thirdquarterof1998)realGDP=$7,566billionmoneystock=$1,072billionvelocity=7.964Inthethirdquarterof1998,thepricelevelwasequalto112.84%ofits1992level19Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelExaTheMoneyStockTheFederalReservedeterminesthemoneystockintheU.S.thedeterminationofthemoneystockisthebasictaskofmonetarypolicyTheFederalReservecandirectlyimpactthemonetarybasethesumofcurrencyincirculationanddepositsattheFederalReserve’stwelvebranches20Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockTheFederalResTheMoneyStockToreducethemonetarybase,theFederalReservesellsshort-termgovernmentsecuritiesToincreasethemonetarybase,theFederalReservebuysshort-termgovernmentsecuritiesThesetransactionsarecalledopenmarketoperations21Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockToreducethemFigure8.5-OpenMarketOperations22Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.5-OpenMarketOperaTheMoneyStockTheFederalReservedirectlycontrolsthemonetarybaseTheothermeasuresofthemoneystockaredeterminedbytheinteractionofthemonetarybasewiththebankingsectorregulatoryrequirementstheincentiveoffinancialinstitutionstohaveenoughfundsonhandtosatisfydepositors’demands23Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockTheFederalResTheMoneyStockBesidesthemonetarybase(H),thereareotherdefinitionsofthemoneystocksuchasM1(currency,checkingaccounts,travelerschecks)M2(M1plussavingsaccounts,smalltermdeposits,moneyheldinmoneymarketaccounts)M3(M2pluslargetermdepositsandinstitutionalmoneymarketbalances)24Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockBesidesthemonTable8.1-MeasuresoftheMoneyStock25Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Table8.1-MeasuresoftheMoInflationTheinflationrateistheproportionalrateofchangeinthepricelevelSincetheinflationrate()willbev=growthrateofvelocitym=growthrateofthemoneystocky=growthrateofrealGDP26Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationTheinflationrateisInflationExamplegrowthrateofrealGDP=4%peryeargrowthrateofvelocity=2%peryeargrowthrateofthemoneystock=5%peryear27Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationExample27Copyright?InflationThebulkofchangesintherateofinflationareduetochangesinthegrowthrateofthemoneystockthegrowthrateofthemoneystock(m)canchangequicklyandsubstantiallychangesinthegrowthratesofrealGDP(y)andvelocity(v)aregenerallysmaller28Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationThebulkofchangesiInflationIntherealworld,inflationisnotalwaysproportionaltomoneygrowthinthe1980s,bothinflationandvelocityfellsharplybutthemoneystockgrewinthefirsthalfofthe1990s,velocityfellmeantthathighgrowthofthemoneystockdidnotleadtohighinflationinthesecondhalfofthe1990s,velocitygrewmoneysupplygrowthwasnegativetokeepinflationfromrising29Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationIntherealworld,inFigure8.6-MoneyGrowthandInflationAreNotAlwaysParallel30Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.6-MoneyGrowthandMoneyDemandEconomictheoryimpliesthatmoneydemandshouldbeinverselyrelatedtothenominalinterestratecashandcheckingaccountbalancesearnlittleornointerestthepurchasingpowerofmoneyerodesattherateofinflationtheexpectedrealreturnonmoneyis-e31Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandEconomictheoryimMoneyDemandTheopportunitycostofholdingmoneyisthedifferencebetweentherateofreturnonotherassets(r)andtherateofreturnonmoney(-e)theopportunitycostofholdingmoneyisthenominalinterestrate[i=r+e]Astheopportunitycostofholdingmoney(i)rises,thequantityofmoneybalancesdemandedfalls32Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandTheopportunitycoFigure8.7-MoneyDemandandthe

InflationRate33Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.7-MoneyDemandandMoneyDemandThevelocityofmoneycanberepresentedbyVLrepresentsthefinancialtechnology-driventrendinvelocityV0+Vi(r+e)representsthedependenceofthedemandformoneyonthenominalinterestrate34Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandThevelocityofmoMoneyDemandThedemandfornominalmoneybalancesis35Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandThedemandfornomMoney,Prices,andInflationSupposethattherateofgrowthofthemoneystockpermanentlyincreasestheinflationratewillriseiftherealinterestrateisstable,theopportunitycostofholdingmoneywillrisethevelocityofmoneywillincreaseifthemoneystockandrealGDPremainfixed,thepricelevelwilljumpsuddenlyanddiscontinuously36Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Money,Prices,andInflationSuFigure8.8-EffectsofaRiseinMoneyGrowth37Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.8-EffectsofaRiseTheCostsofInflationThecostsofexpectedinflationaresmallrequiresyoutomakemoretripstothebankfirmsmustspendresourceschangingtheirpriceshouseholdsfinditdifficulttodetermineagooddealfromabadoneourtaxlawsarenotdesignedtodealwellwithinflation38Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheCostsofInflationThecostTheCostsofInflationThecostsofunexpectedinflationaremoresignificantredistributeswealthfromcreditorstodebtorscreditorsreceivelesspurchasingpowerthantheyhadanticipateddebtorsfindthepaymentstheymustmakelessburdensomethantheyhadexpected39Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheCostsofInflationThecostHyperinflationoccurswheninflationrisestomorethan20percentpermonthariseswhengovernmentsattempttoobtainextrarevenuebyprintingmoneyfinancingitsspendingbylevyingataxonholdingsofcashknownasaninflationtax40Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.HyperinflationoccurswheninflFigure8.9-TheInflationTax41Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.9-TheInflationTaxHyperinflationEventuallypricesrisesorapidlythatthemonetarysystembreaksdownpeoplewouldratherdealinbartertermsRealGDPbeginstofalltheeconomylosesthebenefitsofthedivisionoflaborIntheend,thecurrencybecomesworthless42Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.HyperinflationEventuallypriceChapterSummaryBy“money”economistsmeansomethingspecial:wealthintheformofreadily-spendablepurchasingpowerWithoutmoneyitishardtoimaginehowoureconomycouldsuccessfullyfunctionthefactthateveryonewillacceptmoneyaspaymentforgoodsandservicesisnecessaryforthemarketeconomytofunction43Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterSummaryBy“money”econChapterSummaryMoneyisnotonlyamediumofexchange,itisalsoaunitofaccount:ayardstickthatweusetomeasurevaluesandtospecifycontracts44Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterSummaryMoneyisnotonChapterSummaryMoneydemandisdeterminedbybusinesses’andhouseholds’desiretoholdwealthintheformofreadily-spendablepurchasingpowertocarryouttransactionsbusinesses’andhouseholds’recognitionthatthereisacosttoholdingmoneywealthintheformofreadily-spendablepurchasingpowerpayslittleornointerest45Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterSummaryMoneydemandisChapterSummaryThevelocityofmoneyishowmanytransactionsagivenpieceofmoneymanagestofacilitateinayeartheprincipaldeterminantofvelocityistheeconomy’s“transactionstechnology”ThestockofmoneyisdeterminedbythecentralbanktheFederalReserveintheU.S.46Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterSummaryThevelocityofChapterSummaryThepricelevelisequaltothemoneystocktimesthevelocityofmoneydividedbythelevelofrealGDPTheinflationrateisequaltotheproportionalgrowthrateofthemoneystockplustheproportionalgrowthrateofvelocityminustheproportionalgrowthrateofrealGDP47Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterSummaryThepricelevelChapterSummaryGovernmentscausehyperinflationbecauseprintingmoneyisawayoftaxingthepublic,andagovernmentthatcannottaxanyotherwaywillbestronglytemptedtoresorttoit48Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterSummaryGovernmentscauCHAPTER8Money,Prices,andInflation49Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.CHAPTER8Money,Prices,andInQuestionsWhatdoeconomistsmeanby“money”?Whyismoneyuseful?Whatdoeconomistsmeanwhentheysaythatmoneyisaunitofaccount?Whatdeterminesthepricelevelandtheinflationrate?50Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.QuestionsWhatdoeconomistsmeQuestionsWhywouldagovernmentevergenerate“hyperinflation”?Whatdeterminesthelevelofmoneydemand?Whatdeterminesthelevelofthemoneysupply?Whyisinflationseenassomethingtobeavoided?51Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.QuestionsWhywouldagovernmenInflationInthe1970s,theUnitedStatesexperiencedanepisodeofrelativelymildinflationpricesrosebetweenfiveandtenpercentperyearcausedsignificanteconomicandpoliticaltraumaavoidingarepeatoftheinflationofthe1970sremainsamajorgoalofeconomicpolicy52Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationInthe1970s,theUniFigure8.1-Post-WorldWarIIInflationintheUnitedStates,1951-200053Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.1-Post-WorldWarIITheFlexible-PriceModelTheClassicaldichotomyimpliesthatrealvariables(realGDP,realinvestmentspending,ortherealexchangerate)canbeanalyzedandcalculatedwithoutconsideringnominalvariables(pricelevel)moneyis“neutral”Thisisaspecialfeatureofthefull-employmentflexible-pricemodel54Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheFlexible-PriceModelTheClMoneyiswealththatisheldinareadily-spendableformismadeupofcoinandcurrencycheckingaccountbalancesotherassetsthatcanbeturnedintocashordemanddepositsnearlyinstantaneously,withoutriskorcost55Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyiswealththatisheldinTheUsefulnessofMoneyWithoutmoney,markettransactionswouldhavetobeperformedthroughbarterInabartereconomy,marketexchangewouldrequirethecoincidenceofwantsyouwouldhavetohavesomegoodorservicethatsomeonewantsandheorshewouldhavetohavesomegoodorservicethatyouwant56Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheUsefulnessofMoneyWithoutFigure8.2-CoincidenceofWants57Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.2-CoincidenceofWaTheUsefulnessofMoneyMoneyalsoservesasaunitofaccountmoneyisusedasayardsticktomeasurevalueorquotepricesAnythingthatalterstherealvalueofmoneyintermsofitspurchasingpowerwillalsoaltertherealtermsofexistingcontractsthatusethemoneyasaunitofaccount58Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheUsefulnessofMoneyMoneyaTheDemandforMoneyBusinessesandhouseholdshaveademandformoneytheywanttoholdacertainamountofwealthintheformofreadily-spendablepurchasingpowertocarryouttransactionsahigherlevelofspendingmeansalargermoneydemandThereisacostofholdingmoneycashandcheckingdepositsearnlittleornointerest59Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheDemandforMoneyBusinessesFigure8.3-ReasonsforandOpportunityCostofHoldingMoney60Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.3-ReasonsforandOTheQuantityTheoryofMoneyassumesthattheonlyimportantdeterminantofthedemandformoneyistheflowofspendingcanbesummarizedusingtheCambridgemoney-demandfunctionthequantityequation61Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheQuantityTheoryofMoneyasTheQuantityTheoryofMoney(PY)representsthetotalnominalflowofspendingMisthequantityofmoneyVisameasureofhowfastmoneymovesthroughtheeconomyhowmanytimestheaverageunitofmoneyisusedtobuyafinalgoodorservice62Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheQuantityTheoryofMoney(PFigure8.4-TheVelocityofMoney63Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.4-TheVelocityofMDeterminingthePriceLevelIntheflexible-pricemodelofthemacroeconomyrealGDP(Y)isequaltopotentialGDP(Y*)thevelocityofmoneyisdeterminedbythesophisticationofthebankingsystemthemoneysupplyisdeterminedbythecentralbank64Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelInDeterminingthePriceLevelIfthepricelevelishigherthanthequantityequationpredictshouseholdsandbusinesseswillhavelesswealthintheformofmoneythantheywishtheywillcutbackonpurchasessellerswillnotedemandisweakandlowerprices65Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelIfDeterminingthePriceLevelIfthepricelevelislowerthanthequantityequationpredictshouseholdsandbusinesseswillhavemorewealthintheformofmoneythantheywishtheywillincreasepurchasessellerswillnotedemandisstrongandraiseprices66Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelIfDeterminingthePriceLevelExample(thirdquarterof1998)realGDP=$7,566billionmoneystock=$1,072billionvelocity=7.964Inthethirdquarterof1998,thepricelevelwasequalto112.84%ofits1992level67Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.DeterminingthePriceLevelExaTheMoneyStockTheFederalReservedeterminesthemoneystockintheU.S.thedeterminationofthemoneystockisthebasictaskofmonetarypolicyTheFederalReservecandirectlyimpactthemonetarybasethesumofcurrencyincirculationanddepositsattheFederalReserve’stwelvebranches68Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockTheFederalResTheMoneyStockToreducethemonetarybase,theFederalReservesellsshort-termgovernmentsecuritiesToincreasethemonetarybase,theFederalReservebuysshort-termgovernmentsecuritiesThesetransactionsarecalledopenmarketoperations69Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockToreducethemFigure8.5-OpenMarketOperations70Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.5-OpenMarketOperaTheMoneyStockTheFederalReservedirectlycontrolsthemonetarybaseTheothermeasuresofthemoneystockaredeterminedbytheinteractionofthemonetarybasewiththebankingsectorregulatoryrequirementstheincentiveoffinancialinstitutionstohaveenoughfundsonhandtosatisfydepositors’demands71Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockTheFederalResTheMoneyStockBesidesthemonetarybase(H),thereareotherdefinitionsofthemoneystocksuchasM1(currency,checkingaccounts,travelerschecks)M2(M1plussavingsaccounts,smalltermdeposits,moneyheldinmoneymarketaccounts)M3(M2pluslargetermdepositsandinstitutionalmoneymarketbalances)72Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.TheMoneyStockBesidesthemonTable8.1-MeasuresoftheMoneyStock73Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Table8.1-MeasuresoftheMoInflationTheinflationrateistheproportionalrateofchangeinthepricelevelSincetheinflationrate()willbev=growthrateofvelocitym=growthrateofthemoneystocky=growthrateofrealGDP74Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationTheinflationrateisInflationExamplegrowthrateofrealGDP=4%peryeargrowthrateofvelocity=2%peryeargrowthrateofthemoneystock=5%peryear75Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationExample27Copyright?InflationThebulkofchangesintherateofinflationareduetochangesinthegrowthrateofthemoneystockthegrowthrateofthemoneystock(m)canchangequicklyandsubstantiallychangesinthegrowthratesofrealGDP(y)andvelocity(v)aregenerallysmaller76Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationThebulkofchangesiInflationIntherealworld,inflationisnotalwaysproportionaltomoneygrowthinthe1980s,bothinflationandvelocityfellsharplybutthemoneystockgrewinthefirsthalfofthe1990s,velocityfellmeantthathighgrowthofthemoneystockdidnotleadtohighinflationinthesecondhalfofthe1990s,velocitygrewmoneysupplygrowthwasnegativetokeepinflationfromrising77Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.InflationIntherealworld,inFigure8.6-MoneyGrowthandInflationAreNotAlwaysParallel78Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.6-MoneyGrowthandMoneyDemandEconomictheoryimpliesthatmoneydemandshouldbeinverselyrelatedtothenominalinterestratecashandcheckingaccountbalancesearnlittleornointerestthepurchasingpowerofmoneyerodesattherateofinflationtheexpectedrealreturnonmoneyis-e79Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandEconomictheoryimMoneyDemandTheopportunitycostofholdingmoneyisthedifferencebetweentherateofreturnonotherassets(r)andtherateofreturnonmoney(-e)theopportunitycostofholdingmoneyisthenominalinterestrate[i=r+e]Astheopportunitycostofholdingmoney(i)rises,thequantityofmoneybalancesdemandedfalls80Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandTheopportunitycoFigure8.7-MoneyDemandandthe

InflationRate81Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.7-MoneyDemandandMoneyDemandThevelocityofmoneycanberepresentedbyVLrepresentsthefinancialtechnology-driventrendinvelocityV0+Vi(r+e)representsthedependenceofthedemandformoneyonthenominalinterestrate82Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandThevelocityofmoMoneyDemandThedemandfornominalmoneybalancesis83Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.MoneyDemandThedemandfornomMoney,Prices,andInflationSupposethattherateofgrowthofthemoneystockpermanentlyincreasestheinflationratewillriseiftherealinterestrateisstable,theopportunitycostofholdingmoneywillrisethevelocityofmoneywillincreaseifthemoneystockandrealGDPremainfixed,thepricelevelwilljumpsuddenlyanddiscontinuously84Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Money,Prices,andInflationSuFigure8.8-EffectsofaRiseinMoneyGrowth85Copyright?2002byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Figure8.8-EffectsofaRiseTheCostsofInflationThecostsofexpectedinflationaresmallrequiresyoutomakemoretripstothebankfirmsmustspendresourceschangingtheirpriceshouseholdsfinditdiffic