Chapter 20

Chapter 20 - Chapter 20 Money Growth, Money Demand, and...

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Chapter 20 Money Growth, Money Demand, and Modern Monetary Policy I. Why We Care About Monetary Aggregates a. To avoid sustained episodes of high inflation, a central bank must be concerned with money growth b. Avoiding high inflation means avoiding high growth c. When the currency that people are holding loses value rapidly, they will work to spend what they have as quickly as possible d. It is impossible to have high, sustained inflation without monetary accommodation because the monetary aggregate cannot grow rapidly without the consent of the central bank who controls the monetary base II. The Quantity Theory and the Velocity of Money a. Velocity and the Equation of Exchange i. (number of dollars) x (number of times each dollar is used) = dollar value of transactions ii. the number of times each dollar is used is called the velocity of money iii. purchases of final goods and services produced in a country during a given period and measured at market prices- Nominal GDP iv. (quantity of money) x (velocity of money) = Nominal GDP
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Chapter 20 - Chapter 20 Money Growth, Money Demand, and...

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