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Copyright © 2006 Thomson Learning
3030Money Growth and Inflation
Figure 1 Money Supply, Money Demand, and the Equilibrium Price Level
Copyright © 2004 South-Western
Quantity ofMoney
Value ofMoney, 1/P
Price Level, P
Quantity fixedby the Fed
Money supply
0
1
(Low)
(High)
(High)
(Low)
1/2
1/4
3/4
1
1.33
2
4
Equilibriumvalue ofmoney
Equilibriumprice level
Moneydemand
A
Figure 2 The Effects of Monetary Injection
Copyright © 2004 South-Western
Quantity ofMoney
Value ofMoney, 1/P
Price Level, P
Moneydemand
0
1
(Low)
(High)
(High)
(Low)
1/2
1/4
3/4
1
1.33
2
4
M1
MS1
M2
MS2
2. . . . decreasesthe value ofmoney . . .
3. . . . andincreasesthe pricelevel.
1. An increasein the moneysupply . . .
A
B
Figure 3 Money and Prices During Four Hyperinflations
Copyright © 2004 South-Western
(a) Austria (b) Hungary
Money supply
Price level
Index(Jan. 1921 = 100)
Index(July 1921 = 100)
Price level
100,000
10,000
1,000
10019251924192319221921
Money supply
100,000
10,000
1,000
10019251924192319221921
Figure 3 Money and Prices During Four Hyperinflations
Copyright © 2004 South-Western
(c) Germany
1
Index(Jan. 1921 = 100)
(d) Poland
100,000,000,000,000
1,000,000
10,000,000,0001,000,000,000,000
100,000,000
10,000100
Moneysupply
Price level
19251924192319221921
Price levelMoneysupply
Index(Jan. 1921 = 100)
100
10,000,000
100,000
1,000,000
10,000
1,000
19251924192319221921
Figure 4 The UK Nominal Interest Rate and the Inflation Rate
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Table 1 How Inflation Raises the Tax Burden on Saving
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