Inflation: No Worries Professor Phil Powell Business Economics & Public Policy Faculty Chair, Full-time MBA Program May 14, 2010

Central Bank and Monetary Stimulus relending monetary leakages bank reserves, undeposited cash inject cash buy government bonds lower interest rates money multiplier = money supply / monetary base = $8.4t (M2) / $1.7t (base) = 4.94 in Q central bank remove cash sell government bonds raise interest rates commercial banks

Central Bank and Monetary Stimulus Nominal GDP measures the value of all transactions in a year. The economic activity implied by nominal GDP is supported by a fixed money supply. By deduction, then, the money supply times the average number of times a dollar was spent (velocity) is nominal GDP: Money Supply x Money Velocity = nom GDP (Monetary Base x Money Multiplier) x Money Velocity = nom GDP Terms Monetary Base = Currency + Commercial Bank Deposits in Fed (together this is the potential fuel for inflation) M2 = Currency + Total Checking Deposits + Total Savings Deposits (this is the monetary aggregate used by economists to measure the money supply) Money Multiplier = How much M2 is generated by $1 of Monetary Base Velocity = The average number of times $1 of M2 is spent in a year Base Impact = Money Multiplier x Velocity = How much nominal GDP is generated by $1 of Monetary Base

The Real Inflation Picture