Piisikeämalli

Piisikeämalli, also known as the "pii" model, is a simplified economic model used to explain the relationship between inflation, interest rates, and the money supply. The term "pii" is derived from the Greek letters pi (π) and iota (ι), which represent inflation and the interest rate, respectively. The model was introduced by Milton Friedman in 1963 as part of his quantitative theory of money.

The piisikeämalli assumes that the velocity of money (V) and the quantity of money (M) are constant over time. The model also assumes that the nominal interest rate (i) is equal to the expected inflation rate (π) plus a real interest rate (r). This can be expressed as:

i = π + r

The model further assumes that the price level (P) is determined by the quantity of money and the velocity of money, as expressed by the quantity theory of money:

P = (M * V) / Y

where Y is the real output or GDP.

The piisikeämalli is a useful tool for understanding the relationship between monetary policy and inflation. For example, if the central bank increases the money supply, the price level will rise, leading to higher inflation. To stabilize the price level, the central bank can increase the interest rate, which will reduce the money supply and lower inflation.

However, the piisikeämalli is a highly simplified model and does not account for many real-world factors, such as changes in the velocity of money, expectations, and the real interest rate. Despite its limitations, the piisikeämalli remains an important tool for understanding the basics of monetary economics.