Friday 1009

 




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 9 of 29
…
When the Federal Reserve (Fed) doubles the money supply
· the price level doubles
· dollar prices double
But the real variables production, employment, real wages, and real interest rates, do not change .
The non-connection of monetary changes to real variables is called monetary neutrality.
…
Money, the unit of account, is the ruler used to measure economic transactions.
When the Fed doubles the money supply
· all prices double
· the value of money falls by half
A similar change would occur if the government were to reduce the length of the yard from 36 to 18 inches.
With the new shorter yard, all measured distances (nominal variables) would double.
But the actual distances (real variables) would remain unchanged.
…
The dollar, like the yard is just a unit of measurement, so shouldn’t a change in its value have no real effects?
A change in the length of the yard from 36 to 18 inches would not matter in the long run.
But in the short run it would create confusion and ambiguity, thereby causing
damage to the economy.
Most economists now believe over short periods of time, within the span of a year or two, money changes do affect real variables.
But they believe over a decade monetary changes
· have significant effects on nominal variables, such as the price level
· have only negligible effects on real variables, such as real GDP
… …
See Figure B for cumulative result of inflation in the U.S. over the last 50 years.
+466% cumulative inflation means the average price level in 2025 is about 5.66 times the 1976 level.

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