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PP_Slides_Class_21_Wednesday_April_2

# PP_Slides_Class_21_Wednesday_April_2 - Good Morning Class...

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Good Morning!! Class 21 Wednesday, April 2

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the equation of exchange is used to explain the Quantity Theory of Money 2 versions of the Quantity Theory of Money -crude version -sophisticated version
1. The crude quantity theory of money assumes that a. V and Q remain constant b. V and Q vary c. V is constant and Q varies d. Q is constant and V varies

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2. According to crude versions of the quantity theory of money a. the income velocity of money is highly variable in the short run b. a full employment rate of output is not characteristic of market equilibrium c. a 10-percent increase in the money supply will result in a 10-percent increase in the price level d. a 25-percent decrease in the money supply will result in a 25-percent decrease in velocity e. speculative motives are the major sources of the demand for money
Crude Version (classical economics) %chg M = %chg P because V, Q constant Q is constant: economy is always at FE V is constant: people spend money they get

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3. When we are in a recession, according to the sophisticated quantity theorists, an increase in M will lead to a. a decrease in V b. an increase in V c. an increase in PQ, with most or all of that increase in P d. an increase in PQ, with most or all of that increase in Q
Sophisticated Version (modern monetarists) -short term changes in V are very small or predictable assume V is constant: if economy is below FE: %chg M = %chg Q no chg in P if economy is at FE: %chg M = %chg P no chg in Q

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Hypothetical Aggregate Supply Curve
approximate Time Line classical economics until 1930s Keynes 1936 monetarists 1950s supply-siders 1980s rational expectations 1980s (new classicals) behavioral economics 1990s

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4. A conclusion of the classical macroeconomic model is that a. the average price level is determined by the costs of production b. the average price level is determined strictly by the money supply c. changes in interest rates cause changes in the velocity of money d. sustained unemployment is unavoidable in a market economy
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PP_Slides_Class_21_Wednesday_April_2 - Good Morning Class...

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