Mankiw7e-chap04 - Chapter 4 Money and Inflation The classical theory of inflation causes effects social costs Classical assumes prices are flexible

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1 CHAPTER 4 Money and Inflation The classical theory of inflation causes effects social costs “Classical” – assumes prices are flexible & markets clear Applies to the long run Chapter 4: Money and Inflation
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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
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3 CHAPTER 4 Money and Inflation 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.
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4 CHAPTER 4 Money and Inflation 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.
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5 CHAPTER 4 Money and Inflation 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
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6 CHAPTER 4 Money and Inflation 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
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7 CHAPTER 4 Money and Inflation 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.
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8 CHAPTER 4 Money and Inflation The central bank Monetary policy is conducted by a country’s central bank . In the U.S., the central bank is called the Federal Reserve (“the Fed”). In China, the central bank is People’s Bank of China
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9 CHAPTER 4 Money and Inflation Money supply measures,  May 2009 $8328 M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts M2 $1596 C + demand deposits, travelers’ checks, other checkable deposits M1 $850 Currency C amount ($ billions) assets included symbol
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10 CHAPTER 4 Money and Inflation The Quantity Theory of Money A simple theory linking the inflation rate to the growth rate of the money supply. Begins with the concept of velocity
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11 CHAPTER 4 Money and Inflation Velocity basic concept: the rate at which money circulates definition: the number of times the average dollar bill changes hands in a given time period example: In 2009, $500 billion in transactions money supply = $100 billion The average dollar is used in five transactions in 2009 So, velocity = 5
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CHAPTER 4 Money and Inflation Velocity, cont. This suggests the following definition:
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This note was uploaded on 06/12/2011 for the course ECON 101 taught by Professor Dee during the Spring '10 term at Andhra University.

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Mankiw7e-chap04 - Chapter 4 Money and Inflation The classical theory of inflation causes effects social costs Classical assumes prices are flexible

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