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ECON 20B (45)
Chapter 30

Ch. 30 - Money Growth and Inflation.docx

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Mu- Chun Chen

Ch. 30 : Money Growth and Inflation I. Classical Theory of inflation - hyperinflation: extraordinary high rate of inflation A. Level of prices and value of money - when overall price level rises and value of money decreases B. Money supply, money demand, monetary equilibrium - sell bond contracts money supply - buy bond expands money supply - bank reserve loans money out and = money multiplier - quantity of money demand depends in interest rate person could earn - average level of prices in economy (variable) - price level increases quantity of money demanded - long run: overall level of prices adjust to level at which demand for money = the supply C. Effects of monetary injection - value of money decreases if money is injected to public when increase in money supply increases in price level so each dollar is less valuable - quantity theory of money: quantity of money available determines the price level and the growth rate in the quantity of money available determines inflation rate D. Adjustment process - before injection money supply is at equilibrium - injection = increase demand in goods and supply, but none is altered so money increases so there is an increases in money demand, so new equilibrium reached E. Classical dichotomy and monetary neutrality - nominal variable: var. measured in monetary units - real variable: var. measured in physical unit - classical dichotomy: theoretical separation of nominal and real variables - relative price: price of 1 thing compared to another o not measure terms of money cause 2 money will cancel out o “rate at which” - monetary neutrality: proposition that changes the money supply and doesn’t affect the real variable o don’t matter about long run, but short run will lead to confusion and mistakes F. Velocity and Quantity Equation - velocity of money: rate at which money changes hand - quantity equation: mv=py o increase in quantity of money reflects the 3 variables o price level in
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