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MGEB06H3 Study Guide - Final Guide: Nominal Interest Rate, Fisher Equation, Interest Rate

Economics for Management Studies
Course Code
Iris Au
Study Guide

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University of Toronto
CH 4:
money is the stock of assets that can be readily used to make transactions
Money has three purposes. It is a store of value (a way to transfer
purchasing power from the present to the future), a unit of account
(provides the terms in which prices are quoted and debts are recorded),
and a medium of exchange (use to buy goods and services)
Money (M) x Income Velocity of Money (V) = Price of one unit of
output/GDP Deflator (P) x Output/Real GDP (Y)
oPY = nominal GDP
oIncome Velocity of Money = how many times a dollar bill enters
someone’s income in a given period of time
Real Money Balances = M/P
oExpresses the quantity of money in terms of the quantity of goods
and services it can buy = purchasing power of the stock of money
What determines the economy’s overall level of prices? The theory has
three building blocks:
1. The factors of production and the production function determine the
level of output Y. We borrow this conclusion from Chapter 3.  Productive
capability of the economy determines real GDP
2. The money supply determines the nominal value of output, PY. This
conclusion follows from the quantity equation and the assumption that the
velocity of money is fixed.  Quantity of money determines nominal GDP
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