EC202;notes - CHAPTER 12 P= price level (CGI or GDP...

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CHAPTER 12 P= price level (CGI or GDP deflator) 1/P= Value of of 1 dollar, measured in goods. 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. Quantity theory of money Developed by david hume Quantity of money determines the value of money Money supply is controlled by the Feds The public controls the money demands. 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 require of buy goods and services. Quantity of money demanded is negatively related to the value of money and positively related to P, other things equal. (Other things= real income, interest rates, available atms) A fall in value of money (or increase in P) increases the quantity of money demanded. Increase in money supply causes prices to rise. Classical Dichotomy; theoretical separation of nominal and real values
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EC202;notes - CHAPTER 12 P= price level (CGI or GDP...

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