Ch 28 Money Growth and Inflation

1 / 10

# Ch 28 Money Growth and Inflation - PowerPoint PPT Presentation

Ch 28 Money Growth and Inflation . I. Historic Look (p628)…inflation vs deflation hyperinflation. II. Classical Theory of Inflation . P measured by CPI or GDP delator P measures number of dollars needed to buy basket of goods The Q of goods you can buy with one dollar = 1/P

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about 'Ch 28 Money Growth and Inflation' - ursa

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Ch 28 Money Growth and Inflation

I. Historic Look (p628)…inflation vs deflation

• hyperinflation
II. Classical Theory of Inflation
• P measured by CPI or GDP delator
• P measures number of dollars needed to buy basket of goods
• The Q of goods you can buy with one dollar = 1/P
• So….1/P is the value of money measured in terms of goods and services it buys
• So….as P rises,,,,,the value of money falls
III. Value of Money (Supply and Demand)
• Money Supply (Fed and banking system); MS is vertical because _____________
• Money Demand :MD is downward sloping because __many___determinants: use of credit cards, interest rates, etc.
• --most impt. = price level
• the higher P = lower value of money = more money demanded to buy goods.
• --the higher P = people hold more money.

Price Level

Value = 1/P

If P< Pe?

1

1/2

2

If P > Pe?

4

Monetary Injection…immediate impact? :

Surplus = …..

Spend or save (= more spending) = …increase AD…..but…?

Ability to produce has not changed….so…..

Price Level

Value = 1/P

1

Creates rise in PL and increase in QD b/c now need more for every transaction

1/2

2

4

Q Theory of Money :

• Q of M available determines
• the PL
• Growth rate of Q of M determines
• Inflation Rate
Classical Dichotomy and Monetary Neutrality
• How do monetary changes affect other variables (production, employment, wages)
• David Hume
• classical dichotomy separates “real” and “nominal” variables
Applications
• Price of corn = \$2/bushel …. = nominal
• But the “relative” price: bushel of corn = two bushels of wheat ….. = real
• Dollar prices are nominal ; relative prices are real
• Ex: real wage = real variable
Analogy
• If MS doubles, all P double and the value of a dollar falls by ½
• If change yard from 36 to 18 inches: all measured distances (nominal) would double, but the actual distances (real) would not change
Long run vs. Short run
• Monetary changes do effect short run
• But in long run – only negligible affects on real variables