Econ 2-18 chapter 4
Inflation rate = the percentage increase
in the average level of prices = ∆P/P
Price = amount of money required to
buy a good.
M is the money supply, pi is inflation, p is price level
Since, prices are defined in terms of money we then need to consider nature and supply of
money and how its controlled.
Money is the stock of assets that can be readily used to make transactions
Functions of money
medium of exchange
we use it to buy stuff
store of value
transfers purchasing power from the present to the future
unit of account
the common unit by which everyone measures prices and values
There are two types, fiat money which has no intrinsic value (paper money), and commodity
money that has intrinsic value such as gold coins
The money supply is the quantity of money available in the economy.
Monetary policy is the control over the money supply.
Monetary policy is conducted by a country’s centr