清华大学宏观经济学Chapter-5.pptxVIP

Chapter 5 Inflation: Its Causes, Effects, and Social CostsIN THIS CHAPTER, YOU WILL LEARN:The classical theory of inflationcauseseffectssocial costs“Classical” – assumes prices are flexible markets clear Applies to the long run % change in GDP deflatorU.S. inflation and its trend, 1960–2012long-run trendU.S. inflation and its trend, 1960–2012The quantity theory of moneyA simple theory linking the inflation rate to the growth rate of the money supply.Begins with the concept of velocity…Velocitybasic concept: the rate at which money circulatesdefinition: the number of times the average dollar bill changes hands in a given time periodexample: In 2012, $500 billion in transactionsmoney supply = $100 billionThe average dollar is used in five transactions in 2012So, velocity = 5Velocity, cont.This suggests the following definition:where V = velocity T = value of all transactions M = money supplyVelocity, cont.Use nominal GDP as a proxy for total transactions. Then, where P = price of output (GDP deflator) Y = quantity of output (real GDP) P ? Y = value of output (nominal GDP)The quantity equationThe quantity equation M ? V = P ? Yfollows from the preceding definition of velocity.It is an identity: it holds by definition of the variables.Money demand and the quantity equationM/P = real money balances, the purchasing power of the money supply.A simple money demand function: (M/P )d = k Ywherek = how much money people wish to hold for each dollar of income. (k is exogenous)Money demand and the quantity equationmoney demand: (M/P )d = k Y quantity equation: M ? V = P ? YThe connection between them: k = 1/VWhen people hold lots of money relative to their incomes (k is large), money changes hands infrequently (V is small).Back to the quantity theory of moneystarts with quantity equationassumes V is constant exogenous:Then, quantity equation becomes:The quantity theory of money, cont.How the price level is determined:With V constant, the money supply det