302-04 - C H A P T E R Money and Inflation University of...

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C H A P T E R  Money and Inflation University of Wisconsin Charles Engel 4
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CHAPTER 4.01 slide 2 In this chapter, you will learn… The classical theory of inflation causes effects social costs “Classical” – assumes prices are flexible & markets clear Applies to the long run
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U.S. inflation and its trend , 1960-2006 slide 3 0% 3% 6% 9% 12% 15% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 long-run trend % change in CPI from 12 months earlier
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CHAPTER 4.01 slide 4 The connection between  money and prices Inflation rate = the percentage increase in the average level of prices. Price = amount of money required to buy a good. Because prices are defined in terms of money, we need to consider the nature of money, the supply of money, and how it is controlled.
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CHAPTER 4.01 slide 5 Money:  Definition Money Money is the stock is the stock of assets that can be of assets that can be readily used to make readily used to make transactions. transactions.
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CHAPTER 4.01 slide 6 Money:  Functions medium of exchange we use it to buy stuff store of value transfers purchasing power from the present to the future unit of account the common unit by which everyone measures prices and values
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CHAPTER 4.01 slide 7 Money:  Types 1. fiat money has no intrinsic value example: the paper currency we use 2. commodity money has intrinsic value examples: gold coins, cigarettes in P.O.W. camps
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CHAPTER 4.01 slide 8 Discussion Question Which of these are money? a. Currency b. Checks c. Deposits in checking accounts (“demand deposits”) d. Credit cards e. Certificates of deposit (“time deposits”)
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CHAPTER 4.01 slide 9 The money supply and  monetary policy definitions The money supply is the quantity of money available in the economy. Monetary policy is the control over the money supply.
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CHAPTER 4.01 slide 10 The central bank Monetary policy is conducted by a country’s central bank . In the U.S., the central bank is called the Federal Reserve (“the Fed”). The Federal Reserve Building Washington, DC
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CHAPTER 4.01 slide 11 Money supply measures,  April 2006 $6799 M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts M2 $1391 C + demand deposits, travelers’ checks, other checkable deposits M1 $739 Currency C amount ($ billions) assets included symbol
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CHAPTER 4.01 slide 12 The Quantity Theory of Money A simple theory linking the inflation rate to the growth rate of the money supply. Begins with the concept of velocity
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CHAPTER 4.01 slide 13 Velocity basic concept: the rate at which money circulates definition: the number of times the average dollar bill changes hands in a given time period example: In 2007, $500 billion in transactions money supply = $100 billion The average dollar is used in five transactions in 2007 So, velocity = 5
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slide 14 Velocity, 
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302-04 - C H A P T E R Money and Inflation University of...

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