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11-29 lecture notes

11-29 lecture notes - Problems o Inflation can lead to...

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Problems o Inflation can lead to hyperinflation o Price changes are only nominal o One person’s gain is another’s loss o Unemployment is therefore worse that inflation Conservative viewpoint is that economy will self-adjust and take care of itself Liberal viewpoint is that economy will self-adjust, but it will take an extremely long time, so we should inject it with something to help adjust sooner Money supply up, interest down, investment up, consumption up, aggregate demand up, GDP up…and the inverse is true, this is known as the Keynesian theory Monetarists say that MV=PY MV= money supply and velocity of circulation (how often a dollar changes hands)= total expenditures PY= prices and output= nominal GDP (aggregate supply) The result in this equation is that a % change in money supply leads to the same % change in nominal GDP In our economy unemployment cannot exist for a long time provided that wages are allowed to adjust
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