Money Growth and Inflation

.title[
# Money Growth and Inflation
]
.subtitle[
## Macroeconomics for Students of Accounting, Finance and Digital Applications
]
.author[
### Lyuben Ivanov, PhD; Georgy Ganev, PhD
]
.institute[
### Sofia University St Kliment Ohridski
]
.date[
### Apr 25, 2024
]

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.font130[
.pull-right[
_Inflation is always and everywhere a monetary phenomenon..._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
Milton Friedman (1970) &nbsp;
]
]

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<hr>

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# Money and Prices in the Long Run

**(Price) Inflation** 
A process of consecutive, constant and continuous increase in the
overall price level.

The last century of the economic history of humankind is the
century of inflation.

Inflation is a topical and global macroeconomic phenomenon,
which requires specific understanding of its causes.

The major cause for inflation is the increase in the money
supply.

This link is especially valid in the long run.

---

# Money and Prices in Bulgaria

<img src="bulgaria-prices.png" width="100%" height="100%" style="display: block; margin: auto;" />
---

# Classical Theory of Inflation

Inflation as a phenomenon requires a rise in the price level
which is consecutive, constant and continuous for at least some
time.

To have such a process, it is necessary for the prices of many
goods as expressed in money to rise for a long period.

Theoretically, only two things can cause this:

- Goods become more valuable to people with time, the intensity of
satisfied human wants by the marginal units of goods increases and
from there their value rises. This does not sound realistic, especially in
light of decreasing marginal utility of goods;

- The value of money decreases (classical view).

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# Money Market and Price Level

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# Monetary Expansion and Price Level

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# The Quantity Theory of Money

**The quantity theory of money** 
In the long run the quantity of
money determines the price level and the rate of growth
of the quantity of money determines inflation.

**The quantity equation** 
A mathematical expression of the
quantity theory of money.

$$ \sf M \times V = P \times Y $$
where

&nbsp; M &mdash; quantity of money 
&nbsp; V &mdash; velocity of money 
&nbsp; P &mdash; price level 
&nbsp; Y &mdash; real GDP

---

# Theoretical Assumptions

In the long run real GDP (Y) is determined by the real
production factors (the arguments in the production
function) and the quantity of money (M) does not affect it.

The velocity of circulation of money (V) is determined by
factors other than the price level (P) and the quantity of money (M).

Therefore: in the long run when M changes, this causes
neither V, nor Y to change, so the only possibility for
adjustment is for P to change.

Under the theoretical
assumptions, and given the accounting identity of the
quantity equation, a change in M causes, and only causes,
change in P.

---

# Velocity of Money in Bulgaria
<img src="bulgaria-velocity.png" width="100%" height="100%" style="display: block; margin: auto;" />

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# Velocity of Money in USA

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# Velocity of Money in USA

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# Nominal and Real Economic Variables
 
**Nominal economic variables** 
Variables which reflect the
overall market value of economic quantities, obtained by
multiplying prices and quantities and measured in current
monetary units.

**Real economic variables** 
Variables which reflect only physical
volumes of economic quantities, abstract from the current level
of prices and are measured in physical units (or, for the sake of aggregation, in 
constant prices).

---

# .font80[Classical Dichotomy and Monetary Neutrality]
 
**Classical economic dichotomy** 
The separation for the purposes
of economic analysis of the economic variables into nominal
and real, and the resulting separation of the analysis itself into two
parts – nominal and real.

**Monetary neutrality** 
The classical theoretical proposition that
in the long run the quantity of money does not influence (is neutral to) real variables

---

<hr>

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# The Inflation Tax

Three possible ways to finance government spending:
- Direct and indirect taxation;
- Loans;
- Creating money for spending.

The question why there is inflation in the long run, thus,
can have only one possible answer: because the
government creates money to finance itself, which
increases the quantity of money, which causes inflation.

The question why the government is interested in doing
this has a clear answer in political economics:
because money creation is a politically preferable for
politicians way to take real resources
from the citizens and to transfer the control over them to
the government.

---

.pull-right[
_By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
John Maynard Keynes &nbsp;
]

---

# The Fisher Effect

$$ \sf i = r + \pi $$

where

&nbsp; &nbsp; &nbsp; i &mdash; nominal interest rate 
&nbsp; &nbsp; &nbsp; r &mdash; real interest rate 
&nbsp; &nbsp; &nbsp; &pi; &mdash; inflation rate

---

# Fisher Effect in Bulgaria (1991-2013)

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# Fisher Effect in Bulgaria (1999-2022)

<img src="fisher-2.png" width="100%" height="100%" style="display: block; margin: auto;" />
---

.pull-right[
_By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
John Maynard Keynes &nbsp;
]

---

# Long-Run Social Costs of High Inflation

**Shoe leather costs** 
The cost in terms of real resources spent by consumers in their attempts to avoid
the inflation tax when inflation is high.

**Menu costs** 
The cost in terms of real resources spent by producers in changing prices and informing
the public about these changes (e.g. restaurants having to print new menus). If businesses did not
have to spend real resources for making and announcing price changes, they could have used them
for production of consumer goods.

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# Long-Run Social Costs of High Inflation

Price change signals due to inflation interfere with price change signals due to changes in relative
prices of goods, services and factors of production. Since only the latter are useful in terms of
economic decision making and long-run growth, inflation introduces noise and decreases the long-run
efficiency of decisions by consumers and producers.

Under progressive taxation, high inflation leads to “bracket creep” and respectively to effectively
higher rates of taxation on otherwise identical real activities, increasing deadweight loss.

High and variable inflation inevitably introduces an arbitrary redistribution of wealth between
creditors and debtors. Also, this redistribution favors the wealthy and powerful at the expense of the poor.

---

.pull-right[
_Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
John Maynard Keynes &nbsp;
]

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# Questions?

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# Thank You!

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