11-29 lecture notes - Problems o Inflation can lead to hyperinflation o Price changes are only nominal o One person's gain is another's loss o

• 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 •