welcome to this video we're going to discuss now money growth and inflation this is chapter thirty principles of economics remember this is a book of Gregory Mankiw a vision so then first of all we know that as a fact everybody knows that the prices they are not exactly the same for a length of time maybe one day two other time I mean two other day one month compared with other month maybe they're the same but actually some of them they changing they change even even daily so what we call inflation is basically the increase of overall prices this is the definition of inflation basically as we saw previously it is calculated with the percentage change in CPI which is the Consumer Price Index or there is another method which is the GDP deflator that was it was seen in previous chapter in detail so in the case for the United States actually the United States has experienced on average an increase of 3.6% per year and actually we can consider that as a the the prices they have been multiplied by 17 times during the last 80 years actually we can consider some weird periods that the prices they decrease the overall price decreases what we call deflation however this is not usual there is other case for other countries that they have experienced hyperinflation hyperinflation is considered basically when the prices increase more than 50 percent per month actually them like the most famous case is the situation in Africa for Zimbabwe which actually they experienced 24,000 percent in increase of prices actually we're going to try to verify how the quantity theory explain how this phenomena occurs and actually we know that everybody I mean everybody dislikes this when everybody talks about inflation actually we associate that as a bad thing so we are going to take this topic throughout the classical theory of inflation which the the level of prices and the value of money actually it was developed by the first academies we were talking about 19th the very beginning of 19th century and actually we know that for example for an ice cream people they have been paying more and actually it's not poor for preferences is not because everybody likes more ice cream this is just because the money with the time it is less viable if you had to pay like eighty years ago a couple of cents today you need to pay you a dollar butter $52 for the same ice cream so actually this is more related with the value of money than the value of goods so it means that it doesn't imply that the ice cream now is like more expansions expensive than before so we know that the price level is like the price the price of the determined basket of goods and services or how much you can purchase with a determined quantity of money so we can consider that a surprise level so this is the key fact of this situation when we analyze money so the price the love prizes can be considered with the CPI or the GDP deflator actually we can define P as the number of dollars needed to buy a basket or we can make that the reciprocal and then we have the 1 over P is the quantity of goods and services that can be bought with one dollar ok so then this is the situation if the level of prices is 1 so it means you can buy 1 1 for example particular of this of this good with one dollar automatically if you happy to so the price is double compared with 1 so just with one dollar you can purchase half of these specific good or service so then the P is the price of good and services measure in terms of money and the 1 over P is the value of money measured in terms of goods and services so let's talk about the ice cream so if the ice cream is to the value of a dollar is a half cone so you need naturally two dollars do you have one imagine that now the price is 3 so now the value of a dollar is a third cone so actually in Academy we have like a million of products Danya remain exactly the same so we know that the price of money is at any other good that we have reviewed before so how is calculated the price of an or in a determined market well the price is calculated by the forces of supply and demand in preceding chapter actually we had a look how banking system and fed sermons they supply of money so we know that when the fair which is the central bank which has the authority actually they make open market operations so actually when they sell bonds basically they receive dollars and they contract the money supply if it is the opposite that the Federal Reserve buys bonds then they pay dollars in order to get these bonds and then this morning fall into the people hands so then those dollars are deposited in a bank and we know that the multiplier will act so then we know that we take in this model that this demand supply is managed for the Federal Reserve but actually the demand of money is a different story actually it depends on how much wealth people want to hold in liquid form so many factors affect the quantity of people that they want to keep liquid so if you want to keep this money and cash or you want to keep it in deposits in your bank actually they could be some cases how much they rely on credit cards how they work how they are accepted the more they're accepted and the better they the credit card works people prefer to use credit cards but for example you have a credit card that maybe doesn't work properly maybe sometimes it passes orders order it doesn't so definitely maybe this is not like so reliable so you prefer liquid money or maybe you know if an ATM is easy to find so actually when you go to another country or maybe you go to the jungle so some like really difficult place that you know the day the ATM maybe it doesn't exist actually you tend or you are tempted to have more money and liquid more in cash right so actually we will keep here like we will keep here that will be affected in this case just by the interest rate and by government bonds or low interest checking account so when you have a higher interest rate you are 10 tips to keep your money in your bank then you have less incentives to have these money liquid so dad iya is like we we need to verify how you will be managed with the average level of prices in the economy so naturally the higher prices are so you know that you need more money in typical transaction so then the quantity of money demanded will be higher so we are going to verify it it's like okay of EDTV it works for the short and the long run naturally we need to differentiate these two periods in long run basically the money supply and money demand are brought into equilibrium by the overall level of prices so we now know that maybe in the long run the prices or the inflation will not we I mean it's not going to be a key factor for determine actually the market of the of the money supply so for example let's have a look here to a graph actually let's start with a price develop of a clever so it means people want to hold more money than the Federal Reserve has created so then the price should fall until the man is equal to supply otherwise the price level is below the equilibrium people will like to hold less money than Fed has created so then the price level should increase to balance money and supply this is the case imagine we are here we have the value of money measured by one over P keep in mind it is like the higher is like your dollar is less valuable the lower your dollar becomes more valuable okay so here is the situation so we have a price level which is going here it increases above to the bottom and here is the opposite how usually we have the variables so we have here the one over to this is quantity fixed by the demand by the Fed and this is the money supply so then the situation is like imagine like fed prints of money this is like purchasing bonds so each dollar is less valuable now so we'll remember every time that we have a change in fed it means that it changes the supply because they managed supply so when there is an increase and the quantity of money in the market we have these movement this shift from money supply one two-month supply to we started in the situation of a then we now have the Colibri 'im in point b what happened here is like decreases the value of money your dollar become less variable and actually we have here an increase in the level of prices so here we have as a consequence of a money supply increase we have an increase in the price levels so now we're going to have a look a brief look at the judgment process actually we know that there is an excess of money and when there is an excess is money so when you basically you receive more money from one day to another then what are you going to do with that naturally you're going to use at least one portion of that to buy goods and services so imagine that actually they can put like more and in the banks so you can spend or you can put morning did your bank so you are going to generate more money because you know when you deposit the multipliers start to work so they remember that the ability to supply current services has not changed it it remains equal so the Academy's output is determined by basic things they available labor which are basically the inputs that we have the physical capital human capital natural resources and technological if it doesn't change at all then the supply goods and services don't change so here is the situation what happened actually in the short-run so people are using more money for a transaction basically the overall prices for goods and services just to bring money supply demand into balance so this is the situation where demand the place or goes from A to B and is a movement of the money supply so we're going to discuss now the theory behind this idea which is the classical dichotomy and monetary neutral neutrality so we need to understand changes so then we need to split vials until first the nominal ones so all of them they are measured in monetary units and the real ones those are the variables measured in physical units so for example income corn is measured in dollars so then the income corn farmers is a nominal variable but the quantity of corn produced is real money because this is measured in bushels in this case so nominal GDP is a nominal variable real GDP is not so this classical dichotomy which actually was performed by the very big of of group of Academy economists so they created this division of these two groups obviously it's kind of tricky because imagine that the price of wheat and the price of corn these are nominals but worried about relative prices well you know when you talk about relative prices it's a ratio so when you have a ratio for example to Marshalls buy is exactly the same of one bar I'm not sure if it's considering bustles as well but when marshal in wheat so naturally the value of the first the corn is going to be valuable two times so when you make this relative prices the unitary money's cancelled so then the relative prices we consider as a real variable real wage is a real one so the classical dichotomy is very important because we differentiate the forces that influence real and nominal variables and here is the key of this chapter the nominal variables are influenced by changes in the monetary system and then the money is largely irrelevant for explaining real variables but this is just for the long run we this is a great conclusion money per se is not relevant for real economy in the long run so then we know that the economy's production of goods and services actually depends on labor land technology I mean factor supplies and for example we have now that the real interest balance balances the supply and demand for loanable funds so then this is how we represented before we didn't talk about prices and when we analyzed the market of Labor we talked the real ballot and I jibe the the real wage balance actually the supply and demand for labor so this is the idea because actually when there is a double quantity of money the price level doubles dollar which doubles and other VAR values double so then in this easy [Music] interpretation we have that the money doesn't have any change in real variables as production as employment and real wages and real interest rates they remain unchanged so is what we get this powerful conclusion the irrelevance of money in real variables it is called the monetary neutrality so however the history the stories will different the Shorin because were two years actually it can affect real variables so it's something that we need to have or review in detail so in order to continue to develop a little bit more this this theory of the quantity of money we are going to discuss about the velocity and the quantitative question so the question here is how many times a bill is used to pay goods and services this is what we call variable of velocity of money so here we have the price level this one did like kind of a why this is like quantity of output the real GDP and M the quantity of money so we say that the times that a bill is used to pay goods and services in one year is exactly equal as the lab level of prices times the quantity of output over the quantity of money maybe it's not like really easy to understand but let's have a look with an economy that produces just one pixel so when you have these spits I imagine that the production the quantity of output is 1 hundred pizzas imagine that the price of one slice is exactly equal ten then we have now that the quantity of money is fifty in this like artificial academy so we have the velocities exactly equal to 10 which is the price level times output 100 over 50 this is exactly equal to 20 so it means that people spend a total a total 1,000 why because we do have the prices times the product so people spend 1,000 in order to spend 1000 each dollar most change hands 20 times per year because the quantity available is just 50 so this is the velocity of money for that specific Academy if we just put here this M it goes to the other side to multiply we have V times M equal P times y so this is called the quantity equation basically it shows the increase in the quantity of money this must be reflected in one of other three variables so if the quantity of money increases what should happen the price level must rise the quantity of output must rise or the velocity of money should fall and actually this is an interesting interesting graph for Genet States during the 60s to 2015 so here we have basically the quantity of money that we have here the empty you remember this is the quantity of money and here we have the nominal GDP that remember this is the production of any specific years of final goods and services for any specific economy and here this is value at current prices this is no like value in base so this is why this is a nominal variable and increases an increase as well so as you can see here actually the velocity it remains basically the same it doesn't change too much the velocity so then v conclusion for this classical theory of inflation the velocity of money is relatively stable over time we saw with an example but because these velocities is stable when central bank makes a change in quantity of money which is M it causes proportionate changes in the nominal value of output which is P times y which is definition of the nominal GDP Y is determined by factor supply so then money is neutral it doesn't affect the quantity of money fourth when the central bank alters the point of money what happens as a consequence they there is a change in the prices and basically the conclusion is increase of money supply increases the level of prices here is some specific situation this is so interesting because it's different economies I mean economics is not like easy to make some practical experiments you cannot like just put a lot of money in one country to verify what happened it's not as easy as that the laboratory actually for economics is the real life and this is real life for different countries that they experienced hyperinflation we have austria-hungary Germany and Poland and what is the common situation here basically the similar situation of quantity of money and price levels the more money you create the more price level you have then we are going to consider now how inflation could be can of attacks well basically the government can use the print of money to pay their spending obviously as they not produce anything actually the idea is like there is more money in the economy and basically at the end of the day the prices can increase so actually in other conditions with taxes you can maybe just like charge taxes to population so they can be used to pay what they have to pay actually when you have more money in the economy your money is less available and basically the inflation can be considered as a tax to everyone that has money so these why the inflation tax could be considered inflation like a tax is the same consequence now we're going to experience so we're going to talk about the Fisher effect the Fisher effect is based on they increase of the red money basically it takes the dichotomy or the classical dichotomy there it I mean he says that it doesn't affect real variables so actually there is a link and the economy of the present and the economy of the future through changes in saving and investments which is actually the interest real rate so we have one side which is the nominal the interest rate this is the one that we see a banks and it's actually the one that you can find everywhere because they doesn't I mean they don't take into account inflation and it's natural because if your for you are for example asking for a car loan they're going to provide an interest tax and interest rate and you're lucky if in the future the inflation is over this value will the rights for example your inflation is 12% and your debt is 10% take into account that your salary will increase 12% so this is a great deal actually you're paying minus 2 of the trait so because we don't know what is going to happen in the future people present naturally and Chili's different entities they present normal interest rate but the real one is the one that we discount the effect on inflation and actually they really want that really that we really want the really that is relevant so the equation will be the real interest rate is exactly equal to the nominal interest rate minus inflation rate imagine an example we have a nominal interest rate of 7% our inflation rate of 3% and then the real interest rate is 4% so then we have this one the real interest rate exactly equal to this so it basically you have here if you increase money supply in theory this should not affect the real interest because if it's go up but it goes up one by one this one should remain exactly the same so then this is what we call the Fisher effect the change inflation one the nominal interest rate change one the real interest rate should not change so again this is a long-run perspective but in short one we cannot consider that this is a situation how we said that in the real life it happens we have again here the US and we have the relationship between nominal interest rate and inflation as you can see they go they move basically together so this gap between these two this is the real interest rate the higher the gap the higher the interest real rate okay then we are going to discuss now the different costs of inflation it means why inflation will like it and conclusion is basically when we have fun inflation low worth 10% it doesn't effect too much when it goes up 10% when prices need to change more often this is actually when we suffer a lot for this case maybe this is not really easy to understand people who live people who live in our states people who live in Venezuela right now they actually they understand very well the situation of inflation people that they live in Argentina they know as well okay so then actually inflation is like Billy is one of the most important macroeconomic variables that it is seen like a newspaper every single time so if we talk to average person that they don't know too much about money naturally this person will say that they don't like that his or her money value less but imagine the situation that the prices increases but in the same case your salary increase so then is what we call the inflation fallacy because maybe inflation is not bad or it cannot be right very bad in all other variables they change in the same percentage so then inflation Falls it could be that situation other important cost of the inflation is the shoes leather so what does it mean basically is like kind of we know that inflation is similar or can be considered as a tax we saw in the first chapters that when we have attacks the resources they are not allocated properly due to they are not allocated properly and transaction track sanctions are lost we provide a bit weight loss remember that these deadweight loss is the part that is not taking anymore but the consumer neither the producer right so these produce their weight loss people when when you have this one that your money is less viable valuable day by day you try to keep less money in cash because at least they are in the deposit they produce some interest so they go if we consider the Fisher effect they will move exactly with the same of inflation or this if the situation is really extreme maybe you you don't use your money as a store of value so you start to buy food or you start to buy money I mean foreign money foreign currency which is dollars for example so you go more to your bank because you need more cash a I mean more times cash because you don't want to spend or to get have too much money in cash so you can imagine that is paradox but your shows were out more quickly obviously this is not the real cost they show shoe leather is just the name basically this is a real cost for your time to your convenience imagine the situation that you have the money and you need to go different times to the ATM because you know that your money will get less valuable day by day so this is the shoe the shoe leather other cost inflation is what we call the menu cost so we know that most firms basically they don't change the prices every day they keep the prices maybe for a period of one year more or less so this cost price adjustment are called many costs because imagine the situation then that you have your restaurant and every single day you need to print a new menu this is anyway it's not convenient you need to get more of your budget in this situation so and it's just not that but you need that you have a cost of deciding new prices you have a cost of printing new price catalogs you need to send these new prices placing catalogs to dealers and customers you need to advertise with new prices so this is overall the menu cost other costs that maybe it's kind of difficult to understand is the relative price variability of misallocation of resources so when there is an inflation in just one firm adjust price one year the relative price of this product will change compared with other prices or other goods that they are changing every single day so this is the K when the relative prices are changing when all the ones they cannot change so there is again miss allocation of resources because you are valuing your money because of the relative price of the comparison of this good compared with other goods and that's not true because the other ones they are not moving so this is like problem means allocating resources and the inflation induced tax distortions why because inflation basically can discourage savings for example if you have a situation of one tax that if you get if you gain of you earn $100 for a capital and then you need to pay a tax for that you pay a tax for that but actually imagine an inflation so high so then I told the real money that you are earning this is not 100 but you are being charged because of that this is a situation of two economies one with price stability it means zero percent inflation rate and you have another one with 8 percent of the inflation rate they have exactly the same the real interest rates exactly the same is equal to 4 but then we are going to develop or break down these changes the nominal interest rate is 4 and the nominal interest rate for Academy B with inflation is 12 then we have the reduced interest due to we have a 25% tax so we are going to this is going to be charged to the norm interest rate as usual tax system is created so then we have 0.25 times for we we end up with $1 our we end up here with $3 then after the tags of nominal interest rate so we have this 75% of the nominal interest rate so the economy a will have 3% and economy P will have 9% then what should be the interest rate after tax the real one so after the tax nominal interest rate minus the inflation rate should be 3 minus 0 which is the inflation rate so we end up with a real interest rate of 3 other situation if the Academy B because they have a 1 which exactly 9 minus 8 so you see here the difference when you charge in the your nominal rate your effect should be worse for the situation of country with inflation so then it can be solved if a tax law is rewritten taking into account inflation however you know that at this time the tax law is really difficult imagine if you increase with inflation gets even more complicated but anyway some changes have been registered in order to avoid these problems with inflation when we have tax distortion and the last one is the confusion and inconvenience because actually people make some project some ideas thinking about the the target inflation that the central bank provides every single year and when it changes different from that value that people say so people get more confused so people cannot adjust easy as before for example just like when you have the earning firms that they represent your income statement maybe you don't know if this changes to prices or e or if it's because of more quantity so it's more difficult to understand because actually maybe just the nominal variable they have changed but now the the real ones and now this is I guess that now this is the last cost of inflation which is a special cause of unexpected inflation because there are like arbitrary distribution of wealth well basically when you have an expected increase you are located resources in different way as simple as you have a credit and you have a constant interest rate if it's lower than inflation this is definitely a great deal it is higher inflation is tend to be more I mean more unstable I mean before going to this first base situation here is like if you cross your fingers and the inflation is so high you pain low and down there in that the inflation disagree deal order the case then you have the other situation that you need to pay a higher a higher interest rate compared with the inflation and it is considered and when we have countries with higher inflation they foot trade more so when we have double digits those countries they have a higher phone filtration so we have these more uncertainty and then I guess that now this is the last one the cost of inflation inflation is bad bad deflation can be worse because actually Milton Friedman outstanding economist suggest like nominal interest should be like kind of close to zero it means that inflation should be negative because remember again this one the real interest rate plus inflation right is equal to nominal interest rate so if in nominal interest rate is so close to zero and then this interest rate is higher than the nominal interest rate then the inflation should be negative so there are as well many costs and changes in relative prices when we have deflation because you need to change the prices and the relative price changes as well and actually this is really painful for debtors because they need to pay more but world it was expected and actually this deflation is symptom of major issues that it goes basically with unemployment and basically a decrease in the GDP the real one and then a special cause of unexpected inflation arbitrary I guess that never is going to be lost but whatever their arbitrary distributions of wealth so then unexpected increase or aleka's different way so this will actually was like kind of repeated and conclusion we talked about the causes and the costs of inflation why this inflation do we have these problems in the short run and then the first cause is the quantity of money more money it means more inflation and then we know that the short run this neutrality of money is not so clear this is more for the long run okay hope he has worth you have understood better the importance of inflation the cause that we have I go and find out different cases of of inflation hyperinflation and you will find something really really really interesting okay thank you again for watching these videos and more than that hopefully it has been relevant for your studies bye bye