ECO100Y1 Lecture Notes - 1, Money Supply, Deflation

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10 Feb 2014
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Ms0 ms1 rate down from r0 to r1: increase of money supply from ms0 to ms1, driving interest, through transmission mechanism, ad0 shifts to ad1, as a result, real gdp increases to y1, and price level increases. Inflation: the rate at which the price level is rising. In the long run, a change in money supply: Long run neutrality of money r r0 r1" r1. Repeated increases in the money supply produce repeated increases in the price level and thus create inflation. Md1 quantity of money shifting as to as1 (sefl-correction); to p1; - in all cases inflation rate equals (approx. ) money growth rate. Governments print money (rather than raise taxes or borrow) to finance spending; Ca: 2. 2% u. s. 2. 1% china 4. 9% india 8. 1% euro area 2. 1% Current inflation rates (temporarily) high because of high food, commodities (oil, etc) prices. The fallacy: inflation robs people of the purchasing power of their incomes.

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