Eco 202 ch 31 monetary growth and inflation

When Money Dies

InflationCause - Printing money faster than new goods and services are created

Effect - Rising prices

Does money create wealth?

More Money

Make more stuff

Raise prices

Big Mac = 10 SR

1 SR =1/10 of a Big Mac

=

1 SR =1/10 of a Big Mac

Central Bank - SAMA

Money Supply

Dr. Fahad Al Mubarak

Chairman of the BoardGovernor

Saudi Arabia Monetary AgencySAMA

5. Greece, Oct. 1944Highest monthly inflation: 13,800%

Prices doubled every 4.3 days

4. Germany, Oct. 1923Highest monthly inflation: 29,500%

Prices doubled every: 3.7 days

A 1000 Mark banknote, over-stamped in red with "Eine Milliarde Mark" long scale (1,000,000,000 mark), issued in Germany during the hyperinflation of 1923

3. Yugoslavia, Jan. 1994Highest monthly inflation: 313,000,000%

Prices doubled every: 1.4 days

1. Hungary 1946Highest monthly inflation: 13,600,000,000,000,000%

Prices doubled every: 15.6 hours

2. Zimbabwe, Nov. 2008Highest monthly inflation: 79,600,000,000%

Prices doubled every: 24.7 hours

1833 - 1932 $18.94 to $20.69

$1,600 80x Lost 98.75% of value relative to gold in 80 Years

Money Demand

Liquid

Credit Cards ATMs

Money Demand

Opportunity Cost

Potential Profit

Milton Friedman(1912 - 2006)

Quantity Theory of Money

The quantity of money determines

its value

0

0.50

1.00

1.50

2.00

1 10 20 30 40 50

Value of Money

Quantity of Money

MoneyDemand

MoneySupply

How to get an

A on Exam 4

0

0.50

1.00

1.50

2.00

1 10 20 30 40 50

Value of Money

Quantity of Money

MoneyDemand

MoneySupply

The Life of a Riyal

18 months

M x V = P x Q

Quantity Equation

M = MoneyV = VelocityP = PriceQ = Output

Government Spending

TaxBorrow

Print

Inflation TaxWhen the government

prints more money, anyone who has

money loses wealth

Inflation

Winners - Borrowers

Losers - Lenders

Nominal = Real + Inflation

If you know two you can calculate the other oneIf N = 12 and R = 10,

what is I?

N = R + I

Formulas

RR = 1÷ MM

N = R + I

RR = 1÷ MM

FactsSaudi Reserve Ratio: 7%

Saudi ORR: 2%

Saudi Money Supply Growth: 12%

Saudi Inflation Rate: 3.9%

Country with recent hyperinflation: Zimbabwe

Country with recent bank run: Cyprus