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Principles of Economics- Mankiw (5th) 610

Principles of Economics- Mankiw (5th) 610 - 630 PA R T T E...

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630 PART TEN MONEY AND PRICES IN THE LONG RUN economy, it also misses a key point: Inflation is an economy-wide phenomenon that concerns, first and foremost, the value of the economy’s medium of exchange. The economy’s overall price level can be viewed in two ways. So far, we have viewed the price level as the price of a basket of goods and services. When the price level rises, people have to pay more for the goods and services they buy. Al- ternatively, we can view the price level as a measure of the value of money. A rise in the price level means a lower value of money because each dollar in your wal- let now buys a smaller quantity of goods and services. It may help to express these ideas mathematically. Suppose P is the price level as measured, for instance, by the consumer price index or the GDP deflator. Then P measures the number of dollars needed to buy a basket of goods and services. Now turn this idea around: The quantity of goods and services that can be bought with $1 equals 1/ P . In other words, if
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