slide_5 - Money and In&ation (Chapter 4) - Part...

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Unformatted text preview: Money and In&ation (Chapter 4) - Part I Classical Theory of Money and In&ation Rutgers University February 8, 2012 (Institute) Intermediate Macro February 8, 2012 1 / 32 Introduction So far, our entire analysis has been in real terms. No money in the model Ch. 4: study the price level and in&ation. Discuss the economy in nominal terms. Examine the role of money. Price level, In&ation and Monetary policy - one of the central issues (Institute) Intermediate Macro February 8, 2012 2 / 32 High In&ation 1 - Germany 1919: a loaf of bread 0.26 mark 1923: a loaf of bread 80 billion mark This massive in&ation proved enormously costly to German society Many people lost their lifetime savings Many businesses failed One of the factors that led to the rise of the Nazi movement (Institute) Intermediate Macro February 8, 2012 3 / 32 High In&ation 2- Other Episodes Many countries of Latin America (1980s and 1990s) Russia (1990s) U.S. (during the Civil War) the rapid printing of Confederate currency high in&ation in Southern states the currency was worthless transactions in the South were conducted largely by barter (Institute) Intermediate Macro February 8, 2012 4 / 32 Recent decades in the US 50s and 60s: relatively low 70s - early 80s: "Great In&ation" from mid 80s: "Great Moderation" (Institute) Intermediate Macro February 8, 2012 5 / 32 What&s this chapter about? The classical theory of in&ation causes e/ects social costs " Classical it assumes prices are exible Focus on the long-run determinants of ination rate (and the price level) (Institute) Intermediate Macro February 8, 2012 6 32 Questions 1 How does the price level is determined? 2 Where does in&ation come from? 3 What are its costs? 4 How does money supply a/ect the economy? 5 If in&ation is caused by printing too much money, why would the central bank make such mistake? 6 Relationship: in&ation, nominal interest rate, and real interest rate (Institute) Intermediate Macro February 8, 2012 7 32 Price Level and In&ation Denition Price Level ( P ) = the dollar cost of one unit of output ( Y ) = amount of money required to buy one unit of good (Institute) Intermediate Macro February 8, 2012 8 / 32 Price Level and In&ation Denition Price Level ( P ) = the dollar cost of one unit of output ( Y ) = amount of money required to buy one unit of good Denition In&ation rate ( ) = the growth rate of P = P t & P t & 1 P t & 1 = P P (Institute) Intermediate Macro February 8, 2012 8 / 32 What Is Money? De&nition Money is the stock of assets that can be readily used to make transactions. The most liquid asset. (Institute) Intermediate Macro February 8, 2012 9 / 32 What Is Money? De&nition Money is the stock of assets that can be readily used to make transactions....
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This note was uploaded on 02/15/2012 for the course ECON 321 taught by Professor Sani during the Spring '08 term at Rutgers.

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slide_5 - Money and In&ation (Chapter 4) - Part...

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