Principles of Macroeconomics ECON 401 Day 10 Dr

Principles of Macroeconomics ECON 401 Day 10 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” Principles of Macroeconomics, Day 10 卜安吉

Chapter 30: Money Growth and Inflation n What is the relationship between money and prices? – Know the equation of exchange – Also called the Quantity Equation – % D M + % D V = % D P + % D Y Principles of Macroeconomics, Day 10 2

Chapter 30 n What is the Classical Dichotomy? – The Separation of Real and Nominal Variables § That is: variables measured in money - nominal § Versus variables measured in physical units (real) – The price of rice is 1 yuan/bowl – nominal – The price of rice is ½ ear of corn – real Principles of Macroeconomics, Day 10 3

Chapter 30 n Monetary Neutrality – Changes in the Money Supply do NOT affect REAL variables – Only prices are affected n David Hume’s world – accepted as the LONG RUN view of the economy Principles of Macroeconomics, Day 10 4

The Velocity of Money How many times does money change hands? OR How often does the same 10 yuan bill go through your hands? Principles of Macroeconomics, Day 10 5

Chapter 30: Hyperinflation n The definition: over 50% inflation PER MONTH n An example of a country exhibiting hyperinflation and the approximate rate. Principles of Macroeconomics, Day 10 6

Hyperinflation n Yugoslavia – last decade’s example n Zimbabwe – the current example (NY Times) Principles of Macroeconomics, Day 10 7

Hyperinflation How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417. n No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single twoply sheet. A roll costs $145, 750 — in American currency, about 69 cents. n The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe's $500 bill, now the smallest in circulation. n Principles of Macroeconomics, Day 10 8

Hyperinflation From Greg Mankiw’s Blog: n “The trigger of this crisis — hyperinflation — reached an annual rate of 1, 281 percent this month, and has been near or over 1, 000 percent since last April. Hyperinflation has bankrupted the government, left 8 in 10 citizens destitute and decimated the country’s factories and farms. ” n n http: //gregmankiw. blogspot. com/2007/02/hyperinflation-in-zimbabwe. html Principles of Macroeconomics, Day 10 9