Int Macro Econ inflation
Int Macro Econ inflation Economics 5570
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This 2 page Class Notes was uploaded by Ashish Kondoju on Saturday March 12, 2016. The Class Notes belongs to Economics 5570 at Wayne State University taught by Shuan Jung in Spring 2016. Since its upload, it has received 33 views. For similar materials see Intermediate Macroeconomics in Economcs at Wayne State University.
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Date Created: 03/12/16
Inflation: Its causes and effects Velocity Basic concept: the rate at which money circulates Definition: the number of times the average dollar bill changes hands in a given time period Example: In 2015, $500 billion in transactions money supply = $100 billion The average dollar is used in five transactions in 2015 So, velocity = 5 This suggests the following definition: where V = velocity T = value of all transactions M = money supply Use nominal GDP as a proxy for total transactions. Then, where P = price of output (GDP deflator) Y = quantity of output (real GDP) P × Y = value of output (nominal GDP The quantity equation The quantity equation M × V = P × Y follows from the preceding definition of velocity. It is an identity: it holds by definition of the variables. M/P = real money balances, the purchasing power of the money supply. A simple money demand function: d (M/P ) = k Y where k = how much money people wish to hold for each dollar of income. (k is exogenous) d Money demand: (M/P ) = k Y Quantity equation: M × V = P × Y The connection between them: k = 1/V When people hold lots of money relative to their incomes (k is large), money changes hands infrequently (V is small).
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