ECON 305 Lecture Notes - Real Wages, Market Clearing, Seigniorage

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M/p= real money balances, the purchasing power of the money supply. Money supply is controlled by the fed, we want to take it and adjust for prices (m/p)d=ky (money demand) K=1/v (connection b/w money demand and quantity equation) Where k= how much money people wish to hold for each dollar of income (its exogenous) (m/p)d is the demand for real balances. When people hold lots of money relative to their incomes (k is large), money changes hands infrequently (v is small). Assume v is constant and exogenous leading to the quantity theory of money. With v constant, the money supply determines nominal gdp (p y ). Y supplies of k and l and the production function (chap 3). Real gdp (y) is determined by the economy"s p. (greek letter pi ) denotes the inflation rate: The growth rate of a product equals the sum of the growth rates.

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