Inflation is a rise in the price
level. Pure inflation means that
prices of goods and inputs rise
at the same rate.
The real money supply M/P is
the nominal money supply M
divided by the price level P.
The quantity theory of money
says that changes in nominal
money lead to equivalent
changes in the price level (and
money wages) but have no
effect on output and
employment.
The Fisher hypothesis says
higher inflation leads to similarly
higher nominal interest rates.
Hyperinflation is a period of
very high inflation.
The flight from cash is the
collapse in the demand for real
cash when high inflation and
high nominal interest rates
make it very expensive to hold
cash.
Seigniorage is real revenue
acquired by the government
through its ability to print
money.
The inflation tax is the effect of
inflation in raising real revenue
by reducing the real value of the
government’s nominal debt.
The Phillips curve shows a
higher inflation rate is
accompanied by a lower
unemployment rate. It suggests
we can trade off more inflation
for less unemployment, or vice
versa.
The natural rate of
unemployment and natural
level of output are their values
in long-run equilibrium.
The short-run Phillips curve
shows that, in the short run,
higher unemployment is
associated with lower inflation.
The height of the short-run
Phillips curve reflects expected
inflation. In long-run equilibrium
at E, expectations are fulfilled.
A self-fulfilling prophecy is an
expectation that creates the
incentive to make it come true.
A permanent supply shock
affects equilbrium
unemployment and potential
output. A temporary supply
shock leaves these long-run
values unaffected, but shifts the
short-run Phillips curve and the
short-run aggregate supply
schedule for output.
Stagflation is high inflation and
high unemployment, caused by
an adverse supply shock.
People have inflation illusion if
they confuse nominal and real
changes. People’s welfare
depends on real variables, not
nominal variables.
Shoe-leather costs of
inflation are the extra time and
effort in transacting when we
economize on holding real
money.
Menu costs of inflation are the
physical resources needed for
adjustments to keep real things
constant when inflation occurs.
Fiscal drag is the rise in real
tax revenue when inflation
raises nominal incomes,
pushing people into higher tax
brackets in a progressive
income tax system.
Inflation accounting uses fully
inflation-adjusted definitions of
costs, income and profit.
Incomes policy is the direct
control of wages and other
incomes.
Headline inflation was actual
inflation, the growth in the retail
price index RPI. Underlying
inflation was the growth of
RPIX, which is the retail price
index omitting the effect of
mortgage interest rates on the
cost of living.
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