Money Growth and Inflation
Introduced| English |
|---|
| quantity theory of money/ˈkwɒntɪti ˈθɪəri ɒv ˈmʌni/ |
| velocity of money/vəˈlɒsɪti ɒv ˈmʌni/ |
| price level/praɪs ˈlevl/ |
| excessive money supply growth/ekˈsesɪv ˈmʌni səˈplaɪ ɡrəʊθ/ |
| neutrality of money/njuːˈtrælɪti ɒv ˈmʌni/ |
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 $PQ$.
The equation of exchange is:
MV (total spending) = PQ (money value of goods sold).
V, how many times each dollar is spent in a year, is the ______ of money.
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.
Too many dollars chase the same goods, so prices rise to soak them up.
In the long run, real output Q is set by:
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?
Inflation ≈ %ΔM − %ΔQ = 10 − 3 = 7%.
The neutrality of money says that in the long run, more money changes:
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.