EC140 Lecture Notes - Lecture 16: Human Capital, Potential Output, Monetary Reform

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26 Mar 2017
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EC140 Full Course Notes
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Interest rate: opportunity cost of holding money, when interest rates increase, people want to hold less money. Real gdp: if real gdp increases, the number of financial transactions increases, increasing gdp increases money demand. Price level: if the price level increases, more money is needed to keep real value of transactions, increasing the price level increases money demand. Graphed in terms of interest rates (price) and the quantity of money. Changes in supply/demand for money affect the interest rate. Change in interest rate affects consumption and investment. Doubling bank deposits, the value of cash, and prices would have no effect: monetary reform has tested this. Key to effective monetary policy is slow adjustment of prices. A change in interest rates, which causes: A change in aggregate expenditure and aggregate demand, which causes: An increase in real gdp, and an in ationary gap, which causes: An increase in wages and input prices, which causes:

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