Chapters 22 and 23 (2)

Chapters 22 and 23 (2) - Chapters22and23 Lectures...

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Chapters 22 and 23 Lectures Supratim Das Gupta
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Key Questions to Address: How does the money supply affect  inflation and nominal interest rates? Does the money supply affect real  variables like real GDP or the real interest  rate? What are economic fluctuations? What are  their characteristics? How does the model of Aggregate  Demand and Aggregate Supply explain  economic fluctuations?
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MONEY GROWTH AND  INFLATION 3 Chapter 22: Introduction One of the Ten Principles from Chapter 1: Prices rise when the govt prints  too much money. This can be explained by the  Quantity  Theory of Money Most economists believe the quantity  theory  is a good explanation of the long run  behavior  of inflation.   0
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MONEY GROWTH AND  INFLATION 4 The Value of Money P  = the price level  ( e.g. , the CPI or GDP deflator) P  is the price of a basket of goods, measured in  money.    1/ P  is the value of $1, measured in goods. Example:  basket contains one candy bar. If  P  = $2, value of $1 is 1/2 candy bar If  P  = $3, value of $1 is 1/3 candy bar Inflation drives up prices and drives down the  value of money.  0
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The Quantity Theory of Money Developed by 18 th  century philosopher  David Hume and other classical  economists A theory asserting that the quantity of  money available determines the price level  and that the growth rate in the quantity of  money available determines the inflation  rate Quantity Equation:          M x V= P x Y 
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MONEY GROWTH AND  INFLATION 6 Money Supply (MS) In real world, determined by Federal  Reserve,  the banking system, consumers.   In this model, we assume the Fed  precisely controls MS and sets it at some  fixed amount.   0
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MONEY GROWTH AND  INFLATION 7 Money Demand (MD) Refers to how much wealth people want to  hold in liquid form. Depends on  P : An increase in  P  reduces the value of money,  so more money is required to buy goods and  services. Quantity of money demanded depends  positively on P and negatively to the value of  money, other things being equal (These “other things” include real income,  interest rates, availability of ATMs.)   0
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INFLATION 8 MS 1 $1000 Value of Money, 1/ P Price Level, P Quantity of Money 1 ¾ ½ ¼ 1 1.33 2 4 The Money Supply-Demand Diagram MD 1 P adjusts to equate quantity of money demanded with money supply. eq’m
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Chapters 22 and 23 (2) - Chapters22and23 Lectures...

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