ECON 2020 Lecture Notes - Lecture 18: Classical Dichotomy, Demand Curve, Money Supply

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20 Mar 2017
Chapter 17- Money Growth and Inflation
Increase in the overall price levels
Concerned with value of economy’s medium of exchange
Lowers value of money
Money Demand
Reflects how much wealth people want to hold in liquid form
Depends on…
Credit Cards
Availability of ATMs
Interest Rate
Average Level of Prices in the Economy
Demand curve is downward sloping
Money Supply
Determined by Federal Reserve
Supply Curve is vertical
Brought to equilibrium in the long term
Economy is in Equilibrium
New equilibrium shifts supply curve right
Value of money decreases
Price levels increase
Effects of a Monetary Injections
Excess supply of money
Increase in demand for goods and services
Prices increase
Increase in quantity of money demanded
New equilibrium
Classical Dichotomy
Nominal Variables
Variables measured in monetary units (dollar prices)
Real Variables
Variables measured in physical units (real wages, interest rates & prices)
Classical dichotomy
Theoretical separation of nominal and real variables
Developments in monetary system
Influence in nominal variables, but NOT real ones
Changes in money supply does not affect real variables
Money Neutrality
Unrealistic in the short run, but good in theory
Spending/Output in short run depends on money supply
Inflation impacts individuals and industries differently
During recessions, resources are underutilized
Lower spending, production, and income
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