Textbook Notes (368,775)
Canada (162,159)
Economics (280)
ECON 1000 (181)
Chapter 11

Chapter 11

5 Pages
81 Views
Unlock Document

Department
Economics
Course
ECON 1000
Professor
Troy Joseph
Semester
Winter

Description
Chapter 11 Money Growth and Inflation • Inflation: increase in overall level of prices The Classical Theory of Inflation The Level of Prices and the Value of Money • Inflation is more about the money than about the value of goods • Inflation is an economy-wide phenomenon that concerns the value of the economy’s medium of exchange • Suppose: o P = price level as measured by the CPI or GDP deflator o Then P measures number of dollars needed 2 buy basket of G&S o Quantity of G&S that can be bought with $1 = 1/P o If P is the price of G&S measured in terms of money, 1/P is the value of money measured in terms of G&S o WHEN OVERALL PRICE LEVEL RISES, VALUE OF MONEY FALLS Money Supply, Money Demand, and Monetary Equilibrium • Supply and demand determines the value of money • IN THE LONG RUN, THE OVERALL LEVEL OF PRICESADJUSTS TO THE LEVELAT WHICH THE DEMAND FOR MONEY EQUALS THE SUPPLY o If price level above equilibrium level, people want to hold more money than the bank has created so price level must fall 2 balance supply & demand o If price level below equilibrium level, people want to hold less money than the bank has created so the price level must rise 2 balance supply & demand The Effects of a Monetary Injection Chapter 11 Money Growth and Inflation • Economy in equilibrium but bank doubles supply of money by printing bills and dropping them from helicopters • When increase in money supply makes dollars more plentiful, result is increase in price level that makes each dollar less valuable • Quantity Theory of Money: quantity of money available determines price level and the growth rate in the quantity of money available determines inflation rate ABrief Look at the Adjustment Process • Immediate effect of monetary injection: create an excess supply of money • Get rid of excess supply of money: o Buy G&S with their excess holdings of money o Make loans 2 others by buying bonds or depositing the money into a bank savings account  allowing other people 2 buy G&S o BOTH increase demand for G&S • Greater demand 4 G&S causes prices of G&S to increase • The increase in the price level, increases the quantity of money demanded b/c people using more dollars for every transaction The Classical Dichotomy and Monetary Neutrality • Nominal Variables: variables measured in monetary units, dollar prices • Real Variables: variables measured in physical units, relative prices • Classical Dichotomy: separation of nominal and real variables • Relative Price: price of one thing compared to another ($ signs cancel out) • Different forces influence real and nominal variables • Changes in supply of money affect nominal variables but NOT real variables • Monetary Neutrality: changes in money supply do not affect real variables o Government changed 100 cm to 50 cm, nominal (measured) would double, but real (actual) would remain the same. Chapter 11 Money Growth and Inflation o This change won’t matter much in the long run but in the short run, would lead to confusion and mistakes Velocity and the Quantity Equation • How many times per year is the typical dollar used to pay for a newly produced G/S? • Velocity of Money: rate at which money changes hands (speed at which the typical dollar travels around the economy from wallet to wallet) • P = price level (GDP deflator) • Y = quantity of output (real GDP) • M = quantity of money • V = velocity o V = (P X Y)/M • M X V = P X Y o Quantity Equation o Relates quantity of money (M) to nominal value of output (P X Y) o Shows that an increase in the quantity of money in an economy must be reflected in one of 3 variables:
More Less

Related notes for ECON 1000

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit