The higher the economys price level the greater the

The higher the economy's price level, the greater the demand for money
· The quantity of money demanded varies inversely with the
interest rate. (low/high interest rate)
· The supply of money is determined in the end by- The FED
· Monetary policy influences the market interest rate, which
in turn affects the level of planned investment, a component of
aggregated demand
· To increase the money supply, the FED uses open-market purchases of US
government securities as its primary tool
Money supply- increases, interest rate- reduces, investment-
stimulated, aggregated demand- increase, real GDP- increase
( PowerPoint
· The FED could wait to see if the economy recoups on its own
· Recognition of nominal wages could take place. (Lower
production costs push the supply curve rightward, closing the
contractionary gap
· The FED could also lower the interest rate
Equation of exchange
The quantity of money, multiplied by its velocity, V equals nominal GDP, which is the
product of the price level, P, and real GDP, Y

equation of exchange
the quantity of M, multiplied by' its velocity, V equals nominal GDP, which is the product
of the price level, P, and real GDP, Y
Velocity of Money-
The average number of times per year each dollar is used to purchase final goods and
services. Velocity only measures spending on final goods and services. (Given the
GDP and the money supply, each dollar must have been spent 8.5 times on average to
pay for final goods and services).
velocity of money
the average number of times per year each dollar is used to purchase final goods and
services
Money Illusions
Confusion of the real and nominal wages (people thinking they would get more of a
raise if inflation didn’t exists
Expectations of Inflation
The beliefs held by the public about the likely path of inflation for the future
Adaptive Expectations
The theory that the public will form expectations of the future inflation based on the
inflation of the past (up to 1970's)
Expectations Phillips Curve
Shows the relationship between inflation and unemployment, taking into account
expectations of inflation (equation showing that when inflation is high, unemployment is
low)
Rational Expectations
The theory that the public will form expectations of future inflation based on all
information currently available to them (news reports, FED announcements, etc)
Monetary Policy Credibility
Opinions that the public has about its central bank and its leaders specifically that
influences their rational expectations is the FED following its obligation to low and stable
inflation?)

Cost of Unemployment
Costs to society when the unemployment rate is higher than the natural rate of
unemployment (actual output is less than potential output, inefficient use of resources,
unemployment insurance.
Monetarists-
Economists who believe that the money supply has a more substantial impact on short-
term productivity than other factors. [Milton Freidman, Philip Cagan]
Keynesians
Economists who believe that employment levels and aggregate demand have a more
substantial impact on short-term productivity than other factors. [John Maynard Keynes]