Class Notes - 10-31-07

Class Notes - 10-31-07 - Macroeconomics Class Notes CHAPTER...

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Macroeconomics – Class Notes – 10/31/07 CHAPTER 17 – Inflation: Its Causes and Costs Inflation: Causes & Costs CPI Inflation: Increase in price level Increases in average prices, not just a few goods Inflation: Historical Aspects Deflation occurred 1865 – 1896 & 1930s 1938-98: Prices rose 5% per year 1970’s: Prices rose 7% per year 1990’s: prices rose 2-3% per year Inflation: Quantity of Money Theory KEY POINT : o Money growth is the primary cause of inflation o Quantity theory of money Bodin said that as the amount of money increases, the higher the prices Monetary Neutrality Money growth raises inflation However, this does NOT affect the “real” variables (example: the amount of production, employment) o You are just raising the price level, you are not actually getting anything ( not a higher standard of living) Velocity and The Quantity Equation Velocity – This is the number of times typical dollar is used to purchase this year’s goods and services
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