[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

80
70
60
INFLATION RATE (%)
50
40
30
20
10
0
0
10 20 30 40 50 60 70 80
MONEY GROWTH RATE (%)
Figure 28.4
MONEY GROWTH AND
INFLATION
Money growth and inflation are closely related, as this figure shows. Each dot represents
the 1960–1990 average annual inflation rate and rate of money growth for a single
country. In all, 110 countries are shown.
SOURCE: George T. McCandless Jr. and Warren E. Weber, “Some Monetary Facts,” Federal Reserve
Bank of Minneapolis Quarterly Review 19, no. 3 (Summer 1995): 2–11.
acting perfectly efficiently, and knowing that the money supply has multiplied by
ten, would increase their prices tenfold. Thus, the actual amount of goods and services
produced and consumed would be the same. There would be no real effects: the
only difference would be the numbers on the bills, bank statements, and price tags.
The lesson is more general. A change in the supply of money accompanied by a
proportionate change in the price level has no real effects on the economy. When
changing the money supply has no real effect, we say that money is neutral. If the
economy is at full employment and wages and prices are perfectly flexible, prices
will change proportionally to any change in the money supply. Thus, the neutrality
of money is a basic implication of the full-employment model.
Suppose that instead of thinking about onetime changes in the level of the money
supply, we think about what would happen if the money supply grows at 10 percent
per year. Then, the price level and nominal wages also would rise at 10 percent per
year; the rate of inflation would be 10 percent per year, equal to the rate of growth
of the money supply. Rapid money growth would be accompanied by high rates of inflation;
low money growth would be accompanied by low rates of inflation. Figure 28.4
provides some evidence on this implication of the full-employment model. It shows
average annual money supply growth rates and inflation rates for 110 countries for
the period 1960–1990. Just as the full-employment model predicts, there is close to
a one-for-one relationship between the growth rate of the money supply and the
rate of inflation. Rapid money growth and high inflation go together; slow money
growth and low inflation go together.
PRICES AND INFLATION ∂ 611