Tutorial_CHAP04研究报告.ppt

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 balances is a function of income (Y) and the nominal interest rate (i). The higher the level of income Y, the greater the demand for real money balances. As the quantity theory of money explains, money supply and money demand together determine the equilibrium price level. Changes in the price level are, by definition, the rate of inflation. Inflation, in turn, affects the nominal interest rate through the Fisher effect. But now, because the nominal interest rate is the cost of holding money, the nominal interest rate feeds back into the demand for money. Money Supply Money Demand Inflation the Fisher Effect 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. Another cost is related to tax laws. Often tax laws do not take into consideration inflationary effects on income. 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 “greases the wheel