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EC 111 Chapter 17 Lecture Notes

by: Conner Jones

EC 111 Chapter 17 Lecture Notes EC 111

Marketplace > University of Alabama - Tuscaloosa > Economcs > EC 111 > EC 111 Chapter 17 Lecture Notes
Conner Jones
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economics zirlott chapter 17 lecture notes
Principles of Macroeconomics
Class Notes
EC 111 zirlott chapter 17 lecture notes
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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


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