Chapter 30: Money Growth and Inflation

Chapter 30 discusses the money and prices in the economy in the long run. Specifically, it talks about inflation and the difference between nominal and real variables. Overall, the level of prices adjusts to the money supply and demand. However, when inflation happens, the central bank is supplying too much money, causing the price level to rise. In addition, when an inflation tax is presented, this can cause a hyperinflation. One application of the principle of monetary neutrality is the Fisher effect. According to the Fisher effect, when the inflation rate rises, the nominal interest rate rises by the same amount so that the real interest rate remains the same.