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Unformatted text preview: CHAPTER 28 MONEY GROWTH AND INFLATION 631 checking accounts. That is, a higher price level (a lower value of money) increases the quantity of money demanded. What ensures that the quantity of money the Fed supplies balances the quan- tity of money people demand? The answer, it turns out, depends on the time hori- zon being considered. Later in this book we will examine the short-run answer, and we will see that interest rates play a key role. In the long run, however, the an- swer is different and much simpler. In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply. If the price level is above the equilibrium level, people will want to hold more money than the Fed has cre- ated, so the price level must fall to balance supply and demand. If the price level is below the equilibrium level, people will want to hold less money than the Fed has created, and the price level must rise to balance supply and demand. At the equi- librium price level, the quantity of money that people want to hold exactly bal-...
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.
- Spring '10