Principles of Economics- Mankiw (5th) 615

Principles of Economics- Mankiw (5th) 615 - CHAPTER 28 M O...

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CHAPTER 28 MONEY GROWTH AND INFLATION 635 two—there is reason to think that monetary changes do have important effects on real variables. Hume himself also doubted that monetary neutrality would apply in the short run. (We will turn to the study of short-run nonneutrality in Chap- ters 31 to 33, and this topic will shed light on the reasons why the Fed changes the supply of money over time.) Most economists today accept Hume’s conclusion as a description of the econ- omy in the long run. Over the course of a decade, for instance, monetary changes have important effects on nominal variables (such as the price level) but only neg- ligible effects on real variables (such as real GDP). When studying long-run changes in the economy, the neutrality of money offers a good description of how the world works. VELOCITY AND THE QUANTITY EQUATION We can obtain another perspective on the quantity theory of money by consider- ing the following question: How many times per year is the typical dollar bill used
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