This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: E202 CH 12 MONEY GROWTH AND INFLATION 05/04/2008 16:44:00 Inflation is the increase in the overall level of prices. The inflation rate is measured as the percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level Deflation when prices fall. Hyperinflation is an extraordinarily high rate of inflation. THE CLASSICAL THEORY OF INFLATION Explains the long-run determinants of the price level and the inflation rate. THE LEVEL OF PRICES AND THE VALUE OF MONEY The first insight about inflation is that it is more about the value of money than about the value of good. Inflation is an economy-wide phenomenon that concerns, first and foremost, the value of the economys medium exchange. The economies price level can be viewed in two ways: o The price of a basket of goods and services. When the price level rises, people have to pay more for the goods and services they buy. o It is also viewed as a measure of the value of money. A rise in the price level means a lower value of money because each dollar in your wallet now buys a smaller quantity of goods and services. o Example : P is the price of goods and services measured in terms of money, 1/ P is the value of money measured in terms of goods and services. Thus, when the overall price level rises, the value of money falls. MONEY SUPPLY, MONEY DEMAND, AND MONETARY EQUILIBRIUM The supply and demand for money determines the value of money....
View Full Document