Money Growth and Inflation
Introduced| English | Meaning |
|---|---|
| quantity theory of money/ˈkwɒntɪti ˈθɪəri ɒv ˈmʌni/ | A theory relating money supply to the price level through money's velocity and real output. |
| velocity of money/vəˈlɒsɪti ɒv ˈmʌni/ | The ratio of nominal output to the money stock, representing how often each unit of the measured money stock supports spending on final output over a period. |
| price level/praɪs ˈlevl/ | A measure of the average level of prices across an economy. |
| excessive money supply growth/ekˈsesɪv ˈmʌni səˈplaɪ ɡrəʊθ/ | Growth of the money stock beyond what is consistent with the economy's real output growth, money demand and the stated price-stability objective. |
| neutrality of money/njuːˈtrælɪti ɒv ˈmʌni/ | The proposition that a change in the money stock affects nominal variables but not real output, employment or other real variables in the long-run model. |
Where long-run inflation comes from
- A one-off shock can nudge prices, but what drives sustained inflation?
- The classical answer points straight at the money supply.
- Print money faster than the economy grows, and prices must rise.
- This is the quantity theory of money 货币数量论.
The equation of exchange
- The identity: $MV = PQ$.
- $M$ is the money supply; $V$ is the velocity of money 货币流通速度 (how often each dollar is spent); $P$ is the price level 价格水平; $Q$ is real output.
- It is always true: total spending $MV$ equals the money value of goods sold $PQ$.
More money chasing goods: sustained money growth tends to raise the price level over time
The equation of exchange is:
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MV (total spending) = PQ (money value of goods sold).
V, how many times each dollar is spent in a year, is the ______ of money.
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The quantity theory assumes velocity is roughly constant in the long run.
The long-run assumptions
- Velocity $V$ is roughly constant — spending habits change slowly.
- Real output $Q$ is set by real resources — labour, capital, technology — not by how much money exists.
- With $V$ and $Q$ fixed, the price level $P$ moves in step with the money supply $M$.
- So excessive money supply growth 货币供给过度增长 causes long-run inflation.
Real or nominal in the long run?
In the long run, money is neutral: faster money growth raises nominal things (prices, wages) but leaves real output and employment unchanged.
Printing money faster than output can grow causes inflation in the long run.
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Too many dollars chase the same goods, so prices rise to soak them up.
In the long run, real output Q is set by:
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Money does not create real output; real resources do.
Inflation and the neutrality of money
- In growth rates: $\text{inflation} \approx \%\Delta M - \%\Delta Q$.
- Worked idea. If money grows 10% and real output grows 3%, inflation is about $10 - 3 = 7\%$.
- Double money growth to 20% (output still 3%) and inflation jumps to ~17% — but real output still grew 3%.
- That is the neutrality of money 货币中性: in the long run, more money changes only nominal things, not real output.
The money supply grows 10% and real output grows 3%, with velocity steady. What is the approximate inflation rate, in percent?
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Inflation ≈ %ΔM − %ΔQ = 10 − 3 = 7%.
The neutrality of money says that in the long run, more money changes:
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Real output is set by real resources, so extra money just raises prices.
The quantity theory of money ($MV = PQ$) says that, with velocity and real output steady, the price level moves with the money supply. So $\text{inflation} \approx \%\Delta M - \%\Delta Q$, and excessive money growth causes inflation. In the long run money is neutral — it changes only nominal things.
Write from inflation of about 6 percent
- The money supply grows 8 percent. Real output grows 2 percent. Velocity is steady.
- Find approximate inflation.
The money supply grows by 8 percent and real output grows by 2 percent. Velocity stays steady. What is the approximate inflation rate, in percent?
8 minus 2 is 6.
What is the approximate inflation rate?
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Money growth of 8 percent minus output growth of 2 percent is inflation of about 6 percent.