IV.B. - together than real wages and real rental rates do...

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B. The Price Level and the Neutrality of Money This section builds a theory of the price level ( P ) based on household’s willingness to hold the existing stock of money as an asset. 1. Determining the Price Level Barro Ch.10 PP slides 11-14 2. The Price Level has No Real Effects An increase in the dollar price of all goods allows firms to increase the dollar spending on the factors of production. Wages and rental prices of capital must rise proportionally, via competition for these inputs, to eliminate economic profit. If both prices of goods and prices of the factors of production rise
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Unformatted text preview: together than real wages and real rental rates do not change. If real wages and real rental rates don’t change, then the labor and capital service markets remain in the same equilibrium as when the price level was lower, i.e. no change in employment or capital utilization. No change in factor use implies no change in real output. 3. Money has no Real Effects—Money Neutrality Money supply increases, increase dollar spending and the price level. Since the price level has no real effects than neither does the money supply....
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This note was uploaded on 02/19/2011 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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IV.B. - together than real wages and real rental rates do...

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