Chapter 30

Chapter 30 shifts from money, to discussing money growth and inflation. In general, prices in an economy adjust to the equilibrium between money supply and money demand. If the federal reserve increases the supply of money, consequently, inflation increases as well. Nominal variables are measured in monetary units while real variables are measured in physical units. When the money supply is changed it changes the nominal variables not real variables. Monetary neutrality is believed by most to predict the behavior of the economy in the long run. Studies of monetary change on the two variables backs the belief. Money neutrality is the belief that changes in the quantity of money does not effect the real variables. Governments can print money to pay debts, however this leads to hyperinflation. The fisher effect is that when inflation rises, nominal interest rises by the same amount. Inflation does not necessarily make someone poorer because nominal incomes increase at the same rate as well. When governments create money, they gain revenue called inflation tax. Inflation tax is basically a tax on every person in the economy who has money. The velocity of money is the rate at which money is moved between holders and is calculated with the equation of price times quantity of output, divided by the quantity of money. Classical dichotomy is the theoretical difference between the two variables, real and nominal.