EC 111 Chapter 17 Lecture Notes
EC 111 Chapter 17 Lecture Notes EC 111
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This 2 page Class Notes was uploaded by Conner Jones on Monday April 4, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 52 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 04/04/16
EC 111 chapter 17 lecture notes quantity theory of money – prices rise when the government prints too much money (long run inflation) The Value of Money = 1/P (P=price level like CPI or GDP deflator) 1/P is the value of $1, measured in goods if candy bar, aka P=$2, then value of $1 is ½ a candy bar Money Supply (MS) – controlled by Fed, how much money is out there Money Demand (MD) – how much wealth people want to hold in liquid form, positively correlated with P real v nominal variables nominal variables: measured in monetary units (ex: hourly wage, price) real variables: measured in physical units (ex: real GDP, what you can buy with wage) classical dichotomy – the theoretical separation of real and nominal variables if central bank doubles money supply nominal variables such as wage will double but real variables will remain unchanged monetary neutrality – the proposition that changes in the money supply that do not affect real variables Velocity of Money = (P x Y)/MS (the rate at which money changes hands) Nominal GDP = P x Y (price level x real GDP) The quantity equation: MS x V = P x Y what does the quantity equation tell you? o V is stable o A change in MS causes Nominal GDP (P x Y) to change by the same percentage o A change in MS does not affect Y (money is neutral) (Y is determined by technology and resources) o P changes by the same percentage as (P x Y) and MS o Rapid money supply growth causes rapid inflation Hyperinflation Occurs when inflation exceeds 50% a month Caused by government printing way too much money The inflation tax when government prints money it causes inflation, the loss in value of currency is called inflation tax the fisher effect in the long run, money is neutral so a change in money growth rate affects the inflation rate but not the real interest rate nominal interest rate = inflation rate + real interest rate inflation fallacy: most people think inflation erodes real incomes or purchasing power instead, incomes rise with inflation nominal income = real income + inflation costs of inflation shoeleather costs – the resources wasted when inflation encourages people to reduce their money holdings menu costs – the costs of changing prices earning interest on your money helps offset inflation misallocation of resources from relative price variability tax distortions – inflation makes nominal income grow faster than real income