Chapters 22 and 23

Chapters 22 and 23 - Chapters 22 and 23 Lectures Supratim...

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Unformatted text preview: Chapters 22 and 23 Lectures Supratim Das Gupta 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? 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. 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. 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 MONEY GROWTH AND INFLATION 6 Money Supply (MS) In real world, determined by Federal Reserve, the banking system, consumers....
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Chapters 22 and 23 - Chapters 22 and 23 Lectures Supratim...

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