Chp. 12 - Money Growth and Inflation

Chp. 12 - Money Growth and Inflation - Chp. 12 - Money...

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Chp. 12 - Money Growth and Inflation As the price level rises, each dollar is able to purchase fewer goods and services. o Therefore, the value of money decreases with inflation. The price level is a measure of the relative price of a market basket of goods and services. The value of money is how much of a market basket a unit of money can purchase. The value of money and the price level are inversely related. o As the price level rises, the value of money falls, and vice versa. Specifically: Value of Money = 1 / Price Level An open-market bond sale by the Federal Reserve reduces the amount of money in circulation as people exchange currency and bank deposits for bonds. Real variables are those that are measured in physical units, while nominal variables are measured in monetary units According to the quantity theory of money , an increase in the money supply lowers the value of money and increases the price level. o
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This note was uploaded on 04/07/2008 for the course ECON 252 taught by Professor Robertholand during the Fall '08 term at Purdue University-West Lafayette.

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Chp. 12 - Money Growth and Inflation - Chp. 12 - Money...

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