Magsino,Aldjane Marte 6. Quantity Theory of Money + The Quantity Theory of Money —How the price level is determined and why it might change over time is called the quantity theory of money. + The quantity of money available inthe economy determinesthne vakie of mone}. “The primary cause of inflation Is the growth Inthe ‘quantity of money. Inflation Inflationis an increase inthe overall level of prices Hyperinflation isan extraordinarily high rate of inflation. Hyperinflation inflation that exceeds 50 percent per ‘month, Hyperinflation occurs in some countries because the {government prints too much money to pay fr is spending. Classical Theory of Inflation + The quantity theory of money is used to explain. the long-run determinants of the price level and the inflation rate. + Inflation is an economy-wide phenomenon that. concerns the value of the economy's medium of exchange. + When the overall price level rises, the value of money falls. rz g The Classical Dichotomy = Classical dichotomy: the theoretical separation Hume and the classical economists suggested ‘hat monetary Sovelopmerte affect nominal! ~ Mental bank outs he money supp * a noing varblesintuding pices + al eal variables —ietucing retatve prices — wt remain unchanged. Nominal and Real * Nominal variables are variables measured in monetary units. + Real variables are variables measured in physical units Velocity of Money + Thevelosty of money eles tothe speed at which the typical dala bil travels around the economy from wallet to wallet. ven ‘The Velocity of MoneyThe Neutrality of Money © Monetary neutrality: the proposition that changes ~ Doubing money supply causes all nominal pies * Initia, relative price of od in torme of pizza ls pice ated S15!ed 4 6 nrzan per Pree ofpzza ~ Stopaza ~ 7 a a | cet pice of ed _ ‘S pizas por ed prce ofpaze ~ S20pierm Words to Remember: aceon tereserve obo et he cel bak ‘or tae tion no account. ee the terest ate {ustedon bode aa Sedsenios es “ivoratary poe let the atin taken hat fet {heavatoity ard esto money ané crea {Bin gnea as intrest rts ae reduced, are ope ale 10 Sorow mony The reslin tht consumers have more money 9 Sand, ang the economy gro ad nfliontencese (Ans he intrest ote inert, conser en tose ae ens {est fe mrese I the interest ret, he economy sows ond Ion dress ‘The Quantity Theory of Mone “esas that te supply and demand for money determines the @% growing money sup ene into, tus 3 ow interest Ine ford orerut more infton ih teres end ower Under a stem of fine reve banking tered aes ae nition tna fo be mverey caret. hs tors fos one ‘mampult stat = enn interact ate ote he sof ton rs abo reco an nest at or money tat ened en Words to Remember: “heal GOP resre te ake of ial god an ares ‘om aed ristinon of ran ne ony ‘Monetary poe fers to the ators tae that let the ‘holy snd eat of money ae 3 Key Fact about Short — run Ec Fluctuations 2 test macoeconoms nee cute ORE Economic fluctuations unpredictable Ltzonon acuatonscomesond to charg in buses condor hn real ® grows apis goes. Our uch pod 3 conomiexparln, ox fs id that carom sr le nd ‘ostimsexpenc decnig sls nding rts [ezonoms futustins are not a al eee and they ae ost ‘Most Macroeconomics 4 together {Buinen rea GD? fas in» tess, 50 do pone came, capoate yom, conser spending, wvesnent spend, natal prada ‘Dathowgh mary microeconomic vavabes Ructate tone, they ‘ctustebyiterent omens {Giihen economic conons deteriorate, mich of the decng i ‘As output falls, unempl hien el COP dacs, he a of namloyman ‘ree sc oi ae ony coma as nua and thy ra imports pei thus scafrom the long run? Quntityotakoris— Quaniy of bor the Nerhblebutthe — quanntyof cata roductondection aantevoteatal — ndpredcten fromistsoreted orate(e e-taen asain), cared) SIV soe economy inte Shon Eg Facleatiie eedenihonyt hendypadand ae tobe deed en ord recoverale(ie paid andths arerot Sn ‘nye How the economy in the short sen 3 =» from the long run? inandustysed nonin (eventhough fms aries fms Produeaquantyot_markerlce, rh oka Eoy an et ; Tes Macroeconomics Implications: — short run gene define a: the dime arte over when he ‘wags andpos of ther inputs toproducton ae "sch Wiebe ong ron eed eth pr of ie ur ubchneenpt pce oven test Reasoning: tt pices, pees of product sald to cosine) ‘Se more ee than npr pies pes of moter aed to ‘mate mor product) becara the terme conan by og. Note: ‘macroeconomic mportant becaue many macroeconomic rad che ho the tat of monetary and Fea pote he re fects on the ecnamy (leaflet production aha eleven) ‘OM in the sr ram re int or OMY aft nominal Sara cae pres rl vornal vest ang hve nao Tae oa AGGREGATE DEMAND AND AGGREGATE SUPPLY TO EXPLAIN Satu UTE UE eee Meese ena Cz Wid + the model that most ‘economists use to nes ‘explain short-run fluctuations in economic "= activity around its long- run trend AD-AS Model AGBREGATE-DEMANO CURVE + showsthe quantity of feds and senices that househols, firms, the ‘overnment,and ‘customers abroad want tobuy at each price level ~ Why the Aggregate-Demand Curve Slopes Downward C+ lt G+ NX + Assume G is fixed by government poly. My + To understand the slope of AD, we must determine how a change in P 7 affects C1, and NX. THE PRICE LEVEL AND CONSUMPTION: THE 6 WEALTH EFFECT ‘A decrease inthe pie lve raises the rea! volue of money ond makes consumers weather which ip tum encourages them to spend more. The Increase in consumer spending meen’ 0 larger auantiy of goods ond services demanded. Comverse, an inereose inthe pice Ive redices the real velue of money end makes consumers poorer which in tum reduces consumer spending nd he ant of goods ard services demonded.