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Principles of Macro Economics, Ninth Edition
N. Gregory Mankiw
N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PowerPoint Slides prepared by:
V. Andreea CHIRITESCU
Eastern Illinois University
N. Gregory Mankiw
Principles Of Macro Economics
Ninth Edition
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Chapter 30
Money Growth and Inflation
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Inflation, Part 1
Inflation
Increase in the overall level of prices
Deflation
Decrease in the overall level of prices
Hyperinflation
Extraordinarily high rate of inflation
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Inflation, Part 2
2008 to 2018
Prices rose at an average rate of 1.5% per yea
The 1970s
Prices rose by 7.8% per yea
The price level more than doubled over the decade
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Inflation, Part 3
International data, 2018 inflation rate
2.4% in the U.S
1.2 percent in Japan
4.8 percent in Mexico
12 percent in Nigeria
15 percent in Turkey
32 percent in Argentina
Fe
uary 2008, Zimbabwe
24,000% (hyperinflation)
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Classical Theory of Inflation, Part 1
Classical theory of money
Quantity theory of money
Explain the long-run determinants of the price level
Explain the inflation rate
“So what’s it going to be? The same size as last year or the same price as last year?”
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Level of Prices; Value of Money
Inflation
Economy-wide phenomenon
Concerns the value of economy’s medium of exchange
Inflation: rise in the price level
Lower value of money
Each dollar buys a smaller quantity of goods and services
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Classical Theory of Inflation, Part 2
Money demand
Reflects how much wealth people want to hold in liquid form
Depends on
Credit cards
Availability of ATM machines
Interest rate
Average level of prices in economy
Demand curve – downward sloping
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Money supply
Determined by the Fed and the banking system
Supply curve is vertical
In the long run
Money supply and money demand are
ought into equili
ium by the overall level of prices
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The Classical Theory of Inflation, Part 3
N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 1 How the Supply and Demand for Money
Determine the Equili
ium Price Level
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Effects of a Monetary Injection, Part 1
Economy is in equili
ium
If the Fed doubles the supply of money
Prints bills
Drops them on market
Or the Fed: open-market purchase
New equili
ium
Supply curve shifts right
Value of money decreases
Price level increases
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 2 An Increase in the Money Supply
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Effects of a Monetary Injection, Part 2
Quantity theory of money
The quantity of money available in the economy determines (the value of money) the price level
Growth rate in quantity of money available determines the inflation rate
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Adjustment process
Excess supply of money
Increase in demand of goods and services
Price of goods and services increases
Increase in price level
Increase in quantity of money demanded
New equili
ium
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Effects of a Monetary Injection, Part 3
N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Classical Dichotomy, Part 1
Nominal variables
Variables measured in monetary units
Dollar prices
Real variables
Variables measured in physical units
Relative prices, real wages, real interest rate
Classical dichotomy
Theoretical separation of nominal and real variables
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Classical Dichotomy, Part 2
Developments in the monetary system
Influence nominal variables
I
elevant for explaining real variables
Monetary neutrality
Changes in money supply don’t affect real variables
Not completely realistic in short-run
Co
ect in the long run
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Velocity and the Quantity Equation, Part 1
Velocity of money (V)
Rate at which money changes hands
V = (P × Y) / M
P = price level (GDP deflator)
Y = real GDP
M = quantity of money
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Velocity and the Quantity Equation, Part 2
Quantity equation: M × V = P × Y
Quantity of money (M)
Velocity of money (V)
Dollar value of the economy’s output of goods and services (P × Y )
Shows: an increase in quantity of money
Must be reflected in:
Price level must rise
Quantity of output must rise
Velocity of money must fall
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 3 Nominal GDP, the Quantity of Money, and
the Velocity of Money
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Quantity Theory of Money, Part 1
Velocity of money
Relatively stable over time
Changes in quantity of money, M
Proportionate changes in nominal value of output (P × Y)
Economy’s output of goods & services, Y
Primarily determined by factor supplies
And available production technology
Money does not affect output
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Quantity Theory of Money, Part 2
Change in money supply, M
Induces proportional changes in the nominal value of output (P × Y)
Reflected in changes in the price level (P)
When the central bank increases the money supply rapidly
High rate of inflation
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Money and Prices during Four Hyperinflations, Part 1
Hyperinflation
Inflation that exceeds 50% per month
The price level increases more than a hundredfold over the course of a yea
Data on hyperinflation
Clear link between quantity of money and the price level
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Money and Prices during Four Hyperinflations, Part 2
Four classic hyperinflation, 1920s
Austria, Hungary, Germany, and Poland
Slope of the money line
Rate at which the quantity of money was growing
Slope of the price line: inflation rate
The steeper the lines: the higher the rates of money growth or inflation
Prices rise when the government prints too much money
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N. Gregory Mankiw, Principles of Macro Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 4 Money and Prices during Four
Hyperinflations (a) Austria
This figure shows the quantity of money and the price level during four hyperinflations. (Note that these variables are graphed on logarithmic scales. This means that equal vertical distances on the graph represent equal percentage changes in the variable.) In each case, the quantity of money and the price level move closely together. The strong association between these two variables is consistent with the quantity theory of money, which states that growth in the money supply