ECON 11:16

ECON 11:16 - Money cannot affect real GDP - only nominal...

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Money cannot affect real GDP - only nominal GDP - Velocity, how many times a dollar changes hands - Everything that is made in the economy needs to be purchased with the existing money so we can figure out at what speed these transactions happen at If we have excess money growth, this can generate inflation 1) Data says that V is constant 2) Classical dichotomy says that M real variables a. If M goes up, then Y is unaffected 3) Then since V is constant, if M goes up, then P x Y goes up 4) P goes up by same amount as M, If Y is unchanged Why would the fed print so much money if it knew it was going to affect inflation - because, the government may be running a budget deficit o Only 4 ways to get out a budget deficit (i.e If taxes are not enough to cover government spending) Increase taxes Cut government spending Emit bonds Print Money MV = PY (If M ^ then P ^) In Greece and Italy, people do not buy bonds because they don’t trust the government to pay them back -
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This note was uploaded on 01/14/2012 for the course ECON 002 taught by Professor Eudey during the Fall '08 term at UPenn.

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ECON 11:16 - Money cannot affect real GDP - only nominal...

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