Lecture_Economics_Notes_4-27-2010 - Lecture Notes Chapter...

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Lecture Notes Economics T-Th A. Ordonez 809-195-3K1C 4/27/10 Chpt. 22 Money Growth and Inflation Inflation is an increase in the overall level of prices. Hyperinflation is an extraordinarily high rate of inflation. THE CLASSICAL THEORY OF INFLATION Inflation: Historical Aspects o Over the past 60 years, prices in the U.S. have risen on average about 5 percent per year. o Deflation, meaning decreasing average prices, occurred in the U.S. in the nineteenth century. o Hyperinflation refers to high rates of inflation such as Germany experienced in the 1920s. o In the 1970s prices rose by 7 percent per year. o During the 1990s, prices rose at an average rate of 2 percent per year. The Level of Prices and the Value of Money The quantity theory of money is used to explain the long-run determinants of the price level and the inflation rate. Inflation is an economy-wide phenomenon that concerns the value of the economy’s medium of exchange. When the overall price level rises, the value of money falls. Money Supply, Money Demand, and Monetary Equilibrium The money supply is a policy variable that is controlled by the Fed. Through instruments such as open-market operations, the Fed directly controls the quantity of money supplied. Money demand has several determinants, including interest rates and the average
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Lecture_Economics_Notes_4-27-2010 - Lecture Notes Chapter...

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