INFLATION TERMINOLOGY

Secured De; Debts secured by collateral (Mortgage, if not paid property can be sized) Cash rate: Interest rate central bank charges on overnight loans to commercial banks Inflation targeting ; Setting a target inflation and steering towards that target Reserve requirement; Minimum amount of funds banks must retain when lending Inflation ; Sustained increase of price of general goods and services

THREE FUNCTIONS OF MONEY

Medium of exchange Unit of account Store of value

KINDS OF MONEY
Commodity money Gold, silver Fiat money Coins , currency

TWO FUNCTIONS OF RESERVE BANK

Administration of monitory policy Maintaining financial stability

INTRISIC VALUE
Commodity that has a value outside the use as money (Eg, gold)

MONEY MULTIPLIER
Amount of money that banking system generates with each dollar of reserves Money multiplier (M) = 1/R R = Reserve requirement ^ if reserve requirement is 20% money multiplier is 0.5

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If inflation forecast is above the target Tighten monetary policy Sell government securities If inflation target is below the target Buy government securities Expand monetary policy

Problems faced by RBS in controlling the money supply It does not control the deposits held by house holds Does not control the amounts of money lent by banks

MONETORY NEUTRALITY
That face that change in money supply not effecting the real variables like aggregate demand

INFLATION TAX
Government raising revenue by printing money.

MENU COST
Costs associate with changing the price tags and catalogues due to high inflation.

FISHER EQUATION
Nominal interest rate =Real interest rate + Inflation rate

INFLATION TERMINOLOGY
Inflation; Increase in the price of goods and services Hyper inflation; Very level of inflation Quantity theory of money; Relationship between value of money and the price of goods and services Shoeleather costs; Cost of time and effort trying to counter-act inflation Menu costs; Cost of adjusting prices (cost on changing price signs)

Velocity and quantity equation V= (P x Y)/M V= velocity P= the price level Prabudda Missaka s3211475 Page 2

Y = Quantity of output M = Quantity of money

By rewriting this MxV=PxY Quantity of money = nominal value of output

Result of increase in the quantity of money the price level must rise the quantity of output must rise or the velocity of money must fall. Nominal interest rate = Real interest rate + Inflation rate

ECONOMISTS HAVE IDENTIFIED SIX COSTS OF INFLATION:

shoeleather costs menu costs increased variability of relative prices unintended tax liability changes confusion and inconvenience arbitrary redistributions of wealth

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