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Chapter 14 Inflation And Deflation (got 96%)

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Louisiana State University
ECON 2035

Chapter 14Inflation and Deflation 141 Money and Inflation in the Long Run Deflation sustained period of negative inflation The link between money supply and the inflation process starts with velocityVelocity of Money ratio of nominal GDP to the money supply VPYM shows how quickly money moves through the economy VPYM oP is the price levelY is Real GDP M is the money supply oPY is nominal GDP Velocity measures the average number of times the money supply is used in transactions during the year Rearrangement quantity exchange of money or MVPYTotal spending in an economy equals the money supply times each time it is spent in transactions Equation for inflation rate oMVPY oMUPYoMVPYoMVYoMVy Inflation rate is determined by the growth rates of the money supply velocity and real GDP LONG RUN The relationship is a long run relationshipinflation rate may not be the exact same as calculated by this equation The central bank cannot control the growth rate of velocity and output growth Long run output growth rate primarily depends on the productivity of the economy Long run growth rate of velocity primarily depends on transaction technologies Money growth rate INCREASESnominal interest rate DECREASESreal interest rate DECREASES assuming constant inflation rate expectation
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