SIUE ECON 302 - Money, Prices, and Inflation (48 pages)

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Money, Prices, and Inflation



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Money, Prices, and Inflation

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Lecture Notes


Pages:
48
School:
Southern Illinois University Edwardsville
Course:
Econ 302 - Intermediate Macroeconomic Theory

Unformatted text preview:

CHAPTER 8 Money Prices and Inflation 8 1 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Questions What do economists mean by money Why is money useful What do economists mean when they say that money is a unit of account What determines the price level and the inflation rate 8 2 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Questions Why would a government ever generate hyperinflation What determines the level of money demand What determines the level of the money supply Why is inflation seen as something to be avoided 8 3 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Inflation In the 1970s the United States experienced an episode of relatively mild inflation prices rose between five and ten percent per year caused significant economic and political trauma avoiding a repeat of the inflation of the 1970s remains a major goal of economic policy 8 4 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Figure 8 1 Post World War II Inflation in the United States 1951 2000 8 5 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Flexible Price Model The Classical dichotomy implies that real variables real GDP real investment spending or the real exchange rate can be analyzed and calculated without considering nominal variables price level money is neutral This is a special feature of the fullemployment flexible price model 8 6 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Money is wealth that is held in a readilyspendable form is made up of coin and currency checking account balances other assets that can be turned into cash or demand deposits nearly instantaneously without risk or cost 8 7 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Usefulness of Money Without money market transactions would have to be performed through barter In a barter economy market exchange would require the coincidence of wants you would have to have



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