Impact of Global Financial on Capital Market of Pakistan
C H A P T E R
4
Money and Inflation
Notes to the Instructor
Chapter Summary
This chapter explains the classical theory of money. It is important both because the topics covered are central to an understanding of the economy and because many of the concepts introduced are used elsewhere in the book. The chapter has three main goals: 1. To explain the economic meaning of “money” and to introduce money supply and money demand. 2. To examine the effects of monetary policy when prices are flexible. 3. To discuss the costs of inflation.
Comments
This chapter can probably be covered in two lectures, although the material on hyperinflation is quite hard and so may require a little extra time. Since hyperinflations are both fascinating and instructive, this part of the chapter is ultimately very rewarding for the students. The Fisher equation and the distinction between nominal and real rates of interest are among the most important topics in the chapter. I emphasize this as an occasion where macroeconomics provides an important insight that many noneconomists do not understand. I like to tell students that if they understand the Fisher equation, then they know more economics than former President Bush knows (or pretends to know?); see Supplement 14-10, “Distrust of Policymakers.”
Use of the Web Site
This is a good time to use the data to explain and illustrate the Fisher equation.
Chapter Supplements
This chapter includes the following supplements: 4-1 4-2 4-3 4-4 4-5 4-6 4-7 4-8 4-9 4-10 4-11 If You Think the Island of Yap Has Problems… (Case Study p. 80) Credit Cards The Velocity of Money in Poetry and Song Data on Money Growth and Inflation (Case Study p. 87) Seigniorage as an Inflation Tax Seigniorage: How to Create Your Own—Part I Seigniorage: How to Create Your Own—Part II Deriving the Fisher Equation Using Interest Rates to Forecast Inflation (Case Study p. 92) Inflation and Economic Growth The Welfare Costs of Inflation and the Optimum Quantity
4
Money and Inflation
Notes to the Instructor
Chapter Summary
This chapter explains the classical theory of money. It is important both because the topics covered are central to an understanding of the economy and because many of the concepts introduced are used elsewhere in the book. The chapter has three main goals: 1. To explain the economic meaning of “money” and to introduce money supply and money demand. 2. To examine the effects of monetary policy when prices are flexible. 3. To discuss the costs of inflation.
Comments
This chapter can probably be covered in two lectures, although the material on hyperinflation is quite hard and so may require a little extra time. Since hyperinflations are both fascinating and instructive, this part of the chapter is ultimately very rewarding for the students. The Fisher equation and the distinction between nominal and real rates of interest are among the most important topics in the chapter. I emphasize this as an occasion where macroeconomics provides an important insight that many noneconomists do not understand. I like to tell students that if they understand the Fisher equation, then they know more economics than former President Bush knows (or pretends to know?); see Supplement 14-10, “Distrust of Policymakers.”
Use of the Web Site
This is a good time to use the data to explain and illustrate the Fisher equation.
Chapter Supplements
This chapter includes the following supplements: 4-1 4-2 4-3 4-4 4-5 4-6 4-7 4-8 4-9 4-10 4-11 If You Think the Island of Yap Has Problems… (Case Study p. 80) Credit Cards The Velocity of Money in Poetry and Song Data on Money Growth and Inflation (Case Study p. 87) Seigniorage as an Inflation Tax Seigniorage: How to Create Your Own—Part I Seigniorage: How to Create Your Own—Part II Deriving the Fisher Equation Using Interest Rates to Forecast Inflation (Case Study p. 92) Inflation and Economic Growth The Welfare Costs of Inflation and the Optimum Quantity