Chapter 30 Review

Chapter 30 goes in depth about the causes and effects of inflation in an economy. This chapter was more difficult to understand than the other chapters. Some parts that I found it hard to understand were the shoeleather costs and the Fisher effect.  I think that the velocity and quantity equation the book gave was a bit unusual, and the number of times that a single dollar switches ownership is hard to compute. I would give this chapter a 2/3.

The book uses supply and demand to discuss the equilibrium money supply set by the government. It alsouses a variety of examples, numbers, charts and vocabulary to teach about the effects and causes of inflation.

Inflation was introduced as mostly caused by an increase of supply of money in the economy, with the argument that injecting money into the economy promotes economic activity. All economists agree that the costs become huge during hyper-inflation. But their size for moderate inflation, when prices rise by less than 10% per year, is more open to debate. When the central bank reduces the rate of money growth, prices rise less rapidly, as the quantity theory suggests. Yet as the economy makes the transition to this lower inflation rate, the change in monetary policy will have disruptive effects on production and employment, 

Even though monetary policy is neutral in the long run, it has profound effects on real variables in the short run. Many people think that inflation makes them poorer because it raises the cost of what they buy. This view is a fallacy, however, because inflation also raises nominal incomes. The overall level of prices in an economy adjusts to bring money supply and money demand into balance. When the central bank increases, the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to continuing inflation. Overall, the chapter was quite difficult to understand, and is probably the hardest chapter so far.