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Canada (161,862)
Economics (924)
ECN 204 (282)
Chapter 11

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ECN 204
Christos Shiamptanis

Chapter 11 Money Growth and InflationInflation increase in overall level of pricesDeflation prices fallHyperinflation extraordinarily high rate of inflation Quantity theory of money prices rise when the government prints too much money The Classical Theory of Inflation The Level of Prices and the Value of MoneyEnjoyment of a good has stayed the same but the money used to buy a good has become slightly less valuable o More about the value of money than about the value of goodsInflation is an economy wide phenomenon that concerns the value of the economys medium of exchangePrice level rises o People have to pay more for the goods and services they buy o Also could mean a lower value of money bc each dollar in your wallet now buys a smaller quantity of goods and servicesPPrice level o G and S that could be bought with 1 dollar are 1P o 1P is the value of money measured in terms of goods and services o When overall price level rises value of money falls Money Supply Money Demanded Monetary EquilibriumMoney supply o Ignore complications introduced in banking system simply take the quantity of money supplied as a policy variable Money Demand o How much wealth people want to hold in liquid form o Liquidity preference o The average level of prices in the economy important variableHigher prices more money the typical transaction requires and more money people will hold in their wallets and chequing accountsIn the long run the overall level of prices adjusts to the level at which the demand for money equals the supplyWhen the value of money is high the price level is lowSupply curve is vertical bc the BOC has fixed the quantity of money availableDemand curve for money is downward sloping when the value of money is low and the price level is high people demand a larger quantity of it to buy goods and services
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