Ch_4 - Lecture Note Chapter 4 Money and Inflation...

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Lecture Note – Chapter 4 Money and Inflation University of Waterloo Department of Economics Spring 2010
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Introduction Inflation is always and everywhere a monetary phenomenon. ………. . Milton Friedman Inflation is always and everywhere a fiscal phenomenon. ………. . Thomas Sargent CHAPTER 4 Money and Inflation 2
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Introduction This chapter explains the classical theory of money and inflation. The chapter has three main goals: 1. To explain the economic meaning of money and introduce money supply and money demand. 2. To examine the effects of monetary policy when prices are flexible. 3. To discuss the costs of inflation. CHAPTER 4 Money and Inflation 3
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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. 4 CHAPTER 4 Money and Inflation
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U.S. Inflation and its trend, 1960-2009 -3% 0% 3% 6% 9% 12% 15% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 long-run trend % change in CPI from 12 months earlier 5 CHAPTER 4 Money and Inflation
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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. 6 CHAPTER 4 Money and Inflation
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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. 7 CHAPTER 4 Money and Inflation
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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. 8 CHAPTER 4 Money and Inflation
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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 9 CHAPTER 4 Money and Inflation
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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”) 10 CHAPTER 4 Money and Inflation
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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. 11 CHAPTER 4 Money and Inflation
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Monetary policy is conducted by a country’s central bank . In Canada, the central bank is called the The Bank of Canada”. The official website : www.bankofcanada.ca
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Ch_4 - Lecture Note Chapter 4 Money and Inflation...

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