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VocabularyEdit

Quantity Theory of Money

  • Definition: A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.
  • What It Means:

Nominal Variables

  • Definition: Variables measured in monetary units.
  • What It Means:

Real Variables

  • Definition: Variables measured in physical units.
  • What It Means:

Classical Dichotomy

  • Definition: The theoretical separation of nominal and real variables.
  • What It Means:

Monetary Neutrality

  • Definition: The proposition that changes in the money supply do not affect real variables.
  • What It Means:

Velocity of Money

  • Definition: The rate at which money changes hands.
  • What It Means:

Quantity Equation

  • Definition: The equation M x V = P x Y relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services.
  • What It Means:

Inflation Tax

  • Definition: The revenue the government raises by creating money.
  • What It Means:

Fisher Effect

  • Definition: The one-for-one adjustment of the nominal interest rate to the inflation rate.
  • What It Means:

Shoeleather Costs

  • Definition: The resources wasted when inflation encourages people to reduce their money holdings.
  • What It Means:

Menu Costs

  • Definition: The costs of changing prices.
  • What It Means:

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