EC102-11SPRING09b - 111 Inflation The Cause of Inflation in...

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Inflation The Cause of Inflation in the Long Run An increase in the over level of prices We measure inflation by the percent change in the CPI or the GDP deflator The Level of Prices and the Value of Money Inflation is more about the value of money than about the value of goods In the money market, an increase in the quantity of money reduces the value of money by raising the price level Two Alternative Views of the Price Level  When the price level rises, people have to pay more for goods and services A rise in the price level means a lower value of money 11-1
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1 Money Supply, Money Demand and  Monetary Equilibrium o The value of money is determined by the supply and demand for money o Recall individuals hold money for transactions purposes o The higher the price level, the more money a typical transaction requires o So a higher price level( a lower value of money) o Increases the quantity of money demanded o In the long run, the overall level of prices adjust to the level at which the demand for money equals the supply 11-2
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How Supply and Demand for Money Determine the Equilibrium Price  11-3
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11-4
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The Effects of a Monetary Injection 11-5
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The Effects of a Monetary Injection 11-6
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Quantity Theory of Money States that the quantity of money available in the economy determines: The value of money The growth in the quantity of money in the primary cause of inflation Velocity of Money (a key concept in the quantity theory of  money) The rate (speed) at which money circulates or turns over 
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EC102-11SPRING09b - 111 Inflation The Cause of Inflation in...

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