Chapter 8 Model Apps

Inflation

Explore the models of Chapter 8 without any code. Every chart below is live: move its slider to change one part of the model and watch the curves respond, and hover over a line to read its values.

← Back to Chapter 8: Inflation

See also: Chapter 8 Data Apps, the chapter’s data without code.

Testing the quantity theory

Fig. 4: The quantity theory’s prediction for inflation across countries

Move the slider to change real GDP growth in the quantity-theory line; the title counts the economies above it, and hover names each one.

\[ M_tV_t = P_tY_t \]

\[ \pi^* = \bar{g}_M - \bar{g}_Y \]

where \(M\) is money, \(V\) its velocity (held constant), \(P\) the price level, \(Y\) real GDP, and \(\bar{g}_M\) and \(\bar{g}_Y\) the growth rates of money and real GDP.

Takeaway. With constant velocity, money that grows faster than real GDP pushes up prices one for one, so the model predicts that economies lie along the line \(\pi = \bar{g}_M - \bar{g}_Y\). Faster real GDP growth shifts the line down, most visibly at low money growth on the ratio scale; at zero growth it is the 45-degree line. The economies do line up along a rising band, as predicted, but it takes real GDP growth of about 5 to 6 percent, more than the few percent a year it usually grows, to run the line through the middle of the cloud: a sign that velocity fell in many economies.

Sources. Data: World Bank, World Development Indicators, Broad money growth (FM.LBL.BMNY.ZG); World Bank, World Development Indicators, Inflation, consumer prices (FP.CPI.TOTL.ZG), with gaps filled from the World Bank’s Global Inflation Database (Ha, Kose and Ohnsorge 2023). Prepared file: data/ch08/fig8-4.csv (see the data notes). Chart: inspired by Fig. 8.4 in Jones (2024), Macroeconomics, 6th ed.