Econ- Chap 11

Econ- Chap 11 - Overview-11 The causes of inflation Money...

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Overview--11 The causes of inflation Money supply, demand and equilibrium The effects of monetary growth The quantity theory of money The inflation tax The costs of inflation
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Principles of Macroeconomics: Inflation: Its Causes and Costs Inflation is a sustained increase in the price level. It is a continuous increase versus a “once-and-for-all” increase in prices. Inflation deals with the increase in the average of prices and not just significant increases in the price of a few goods.
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Principles of Macroeconomics: Inflation: Historical Aspects Over the past sixty years, prices have risen on average about 4 percent per year. Deflation, a situation of decreasing prices, occurred in the nineteenth century. In the 1970’s prices rose by 7 percent per year. Doubles in 10 yrs. From 1990 to 2007 prices rose about 2 percent per year. Double in 35
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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.
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Principles of Macroeconomics: The Causes of Inflation Inflation is an economy-wide monetary phenomenon that concerns, first and foremost, the value of an economy’s medium of exchange. To understand the cause of inflation as a monetary phenomenon we must understand the concepts of Money Supply, Money Demand, and Monetary Equilibrium.
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Principles of Macroeconomics: Money Supply and Money Demand Money Supply is determined by the Bank of Canada. Through instruments such as open market operations, the B of C directly controls MS Money Demand by the public has several determinants including: interest rates and prices in the economy
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Principles of Macroeconomics: People hold money because it is the medium of exchange. The amount of money people choose to hold depends on incomes and the prices of the goods and services. In the long-run, the overall level of prices adjusts to the level at which the demand for money equals the supply. Money Supply and Money Demand
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Principles of Macroeconomics: Money and Prices (Price axis reversed) Value of Money Price Level Money Demand Q fixed by B of C Money Supply Equilibrium Value of Money Equilibrium Price Level
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Principles of Macroeconomics: Monetary Equilibrium The B of C could inject money (monetary injection) into the economy by buying government bonds. Results would be: The M supply curve shifting to the right The equilibrium value of money decreasing The equilibrium price level increasing This process is referred to as the quantity theory of money .
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2 items Value of M = 1/P 1/ P is the value of $1, measured in goods.
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This note was uploaded on 06/14/2011 for the course ECON 1000 taught by Professor Unknown during the Spring '10 term at Carleton CA.

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Econ- Chap 11 - Overview-11 The causes of inflation Money...

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