Textbook Guide Economics: Nominal Interest Rate, Classical Dichotomy, Neutrality Of Money
Document Summary
The supply and demand for money determines the price of money. The price of money is the interest rate. The above figure shows how the supply and demand for money determine the equilibrium price level. The quantity theory of money says that the quantity of money available determines the price level and that growth rate in the quantity of money available determines the inflation rate. The figure below shows what happens when the fed increases the money supply. After a monetary injection, people find ways to get rid of this new money. They may use it to buy things like additional goods and services, or they may buy bonds or put it into a savings account that earns interest because it is loaned out to others who use it for investments. In both cases, an injection of money increases demand for goods and services. David hume suggested that economic variables be divided into two groups.
