Money in the Short Run

Money in the Short Run - Money in the Short Run Money and...

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Money in the Short Run Money and Output over the Business Cycle In the long run, changes in the money supply are neutral because prices are flexible. The level of output is independent of the nominal money supply. Changes in the nominal money supply affect only the price level. However, the relationship between money and output over the business cycle is procyclical: the growth of the money supply increases during booms and decreases during recessions. Monetary expansions precede booms and monetary contractions precede recessions. The question is "do changes in the money supply cause changes in output or do changes in output cause changes in the money supply?" Changes in Output Causes Changes in the Money Supply Real business cycles theorists argue that the apparent relationship between money and output is one of reverse causation: anticipated changes in output lead to changes in the money supply in the same direction. But, historical research suggests that money is not neutral. Changes in the Money Supply Causes Changes in Output
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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Money in the Short Run - Money in the Short Run Money and...

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