ECO 1102 Lecture Notes - Lecture 12: Classical Dichotomy, Liquidity Preference, Deflation

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ECO 1102 Full Course Notes
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ECO 1102 Full Course Notes
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Inflation: increase in the overall level of prices deflation: fall in the overall level of prices. The classical theory of inflation try to understand inflation with the quantity theory of money. Often called classical because it was developed by some of the earliest thinkers about economic issues. The level of prices and the value of money the e(cid:272)o(cid:374)o(cid:373)y"s o(cid:448)e(cid:396)all p(cid:396)i(cid:272)e le(cid:448)el (cid:272)a(cid:374) (cid:271)e (cid:448)ie(cid:449)ed i(cid:374) t(cid:449)o ways: 1. As the price of a basket of goods and services 2. As a measure of the value of money. Money supply, money demand, and monetary equilibrium the value of money is determined by the supply and demand for money. Recall that the supply of money is controlled by the bank of canada and the banking system. The demand for money reflects how much will people want to hold in liquid form. The demand for (cid:373)o(cid:374)ey is so(cid:373)eti(cid:373)es (cid:396)efe(cid:396)(cid:396)ed to as (cid:862)li(cid:395)uidity p(cid:396)efe(cid:396)e(cid:374)(cid:272)e. (cid:863)

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