Tuesday 929

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 Money Growth and Inflation
Section 3 of 29
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Our study of inflation begins by developing the quantity theory of money.
This theory is called the Classical Theory of Inflation because it was developed by some of the earliest economic thinkers.
Most current economists rely on this theory to explain the long run determinants of the price level and the inflation rate.
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Over the last century the price of an ice cream cone has risen from a nickel to a dollar.
Why are people today willing to pay so much more money for a cone?
It is possible people nowadays enjoy ice cream more?
The actual reason people now pay more for ice cream and all products is over time money has become less valuable.
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The first insight of inflation is it is more about the value of money than about the value of goods.
When the consumer price index and other price indexes rise commentators often look at the many individual prices that make up these indexes.
This approach misses a key point: inflation is an economy-wide phenomenon that most importantly concerns the value of the economy's money.
When we hear “prices of goods increased by one percent last month,” that can be restated “the value of money fell by one percent last month.”
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people enjoy ice cream more now than before
hito wa izen yori aisukurīmu o tanoshinde imasu
今人は以前よりアイスクリームを楽しんで
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The Classical Theory of Inflation - information, ChatGPT:

The Classical Theory of Inflation explains sustained inflation is primarily caused by excessive growth in the money supply.

When the quantity of money increases faster than the economy's production of goods and services, the purchasing power of money decreases and prices rise. This relationship is explained by the quantity equation: M × V = P × Y, where:
M is the money supply
V is the velocity of money (how many times, on average, each dollar is spent on goods and services during a given period)
P is the overall price level
Y is real (inflation adjusted) GDP
Assuming velocity remains stable, money supply growth exceeding real GDP growth results in inflation.
For example, if the money supply increases by 10% while real GDP grows by 3% and velocity remains stable, the price level rises by approximately 6.8%.
((1.1/1.03) – 1) X 100 = 6.8%
The theory also introduces monetary neutrality, the principle that changes in the money supply primarily affect nominal variables, such as prices and wages, rather than real economic production and employment in the long run.
For example, if the money supply doubles while velocity and real output remain unchanged, both the overall price level and wages eventually double.