Inflation is a rise in the price level. Pure inflation means that prices of goods and inputs rise at the same rate.

The real money supply M/P is the nominal money supply M divided by the price level P.

The quantity theory of money says that changes in nominal money lead to equivalent changes in the price level (and money wages) but have no effect on output and employment.

The Fisher hypothesis says higher inflation leads to similarly higher nominal interest rates.

Hyperinflation is a period of very high inflation.

The flight from cash is the collapse in the demand for real cash when high inflation and high nominal interest rates make it very expensive to hold cash.

Seigniorage is real revenue acquired by the government through its ability to print money.

The inflation tax is the effect of inflation in raising real revenue by reducing the real value of the government’s nominal debt.

The Phillips curve shows a higher inflation rate is accompanied by a lower unemployment rate. It suggests we can trade off more inflation for less unemployment, or vice versa.

The natural rate of unemployment and natural level of output are their values in long-run equilibrium.

The short-run Phillips curve shows that, in the short run, higher unemployment is associated with lower inflation. The height of the short-run Phillips curve reflects expected inflation. In long-run equilibrium at E, expectations are fulfilled.

A self-fulfilling prophecy is an expectation that creates the incentive to make it come true.

A permanent supply shock affects equilbrium unemployment and potential output. A temporary supply shock leaves these long-run values unaffected, but shifts the short-run Phillips curve and the short-run aggregate supply schedule for output.

Stagflation is high inflation and high unemployment, caused by an adverse supply shock.

People have inflation illusion if they confuse nominal and real changes. People’s welfare depends on real variables, not nominal variables.

Shoe-leather costs of inflation are the extra time and effort in transacting when we economize on holding real money.

Menu costs of inflation are the physical resources needed for adjustments to keep real things constant when inflation occurs.

Fiscal drag is the rise in real tax revenue when inflation raises nominal incomes, pushing people into higher tax brackets in a progressive income tax system.

Inflation accounting uses fully inflation-adjusted definitions of costs, income and profit.

Incomes policy is the direct control of wages and other incomes.

Headline inflation was actual inflation, the growth in the retail price index RPI. Underlying inflation was the growth of RPIX, which is the retail price index omitting the effect of mortgage interest rates on the cost of living.