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Canada (161,663)
Economics (924)
ECN 204 (282)
Chapter 11

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ECN 204
Christos Shiamptanis

Midterm exam100 MC2 hrs 10 chapters 124567891011 definitions apply concepts calculate things move graphs ppts textbook quick quizzes study guide aplia assignments attendance quizzesChapter 11 Money Growth and InflationQuantity theory of moneyPrices rise when the government prints too much money Explains the longrun determinants of the price level and the inflation rateThe Classical Theory of InflationInflation is an increase in the overall level of prices As the overall price rises the value of money falls Hyperinflation is an extraordinarily high rate of inflationOver the 60 years prices have gone up avg about 4year Deflationdecreasing average prices occurred in Canada in the twentieth centuryThe Value of MoneyPthe price leveleg the CPI or GDP deflator P is the price of a basket of goods measured in money 1P is the value of 1 measured in goodsExamplebasket contains one candy barIf P2 value of 1 is 12 candy barIf P3 value of 1 is 13 candy barInflation drives up prices and drives down the value of money The Quantity Theory of Money th Developed by 18 century philosopher David Hume and the classical economistsAdvocated more recently by Nobel Prize Laureate Milton Friedman Asserts that the quantity of money determines the value of money We study this theory using two approaches 1 A supplydemand diagram2 An equation Money Demand MD Refers to how much wealth people want to hold in liquid formDepends on P An increase in P reduces the value of money so more money is required to buy goodsservicesThus quantity of money demanded is negatively related to the value of money and positively related to P other things equal These other things include real income interest rates availability of ATMs Real vs Nominal VariablesNominal variables are measured in monetary units Examplesnominal GDP nominal interest rate rate of return measured innominal wageper hour workedReal variables are measured in physical unitsExamplesreal GDP real interest rate measured in output real wage measured in output Prices are normally measured in terms of moneyPrice of a compact disc15cd Price of a pepperoni pizza10pizza
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