EC202 1nd Edition Lecture 33Outline of Last Lecture I. Velocity of moneyII. Equation of exchangeOutline of Current Lecture II. Long run inflation rateIII. Aggregate demandCurrent Lecture-In the long run, the inflation rate equals the growth rate of the quantity of money minus the growth rate of potential GDP-Gr(P) = Gr(M) + Gr( V) – Gr(Y*)-Where Gr means “growth rate of”-Growth Rate Rules-Gr(x*y) = Gr(x) + Gr(y)-Gr(x/y) = Gr(x) - Gr(y)-P = (M ´ V) ¸ Y -Gr(P) = Gr(M) + Gr( V) – Gr(Y)-According to the Quantity Theory of Money, V is constant in the long-run (Gr(V) = 0) andY is at Y*-Gr(P) = π = Gr(M) – Gr(Y*)-Thus, the long-run equilibrium inflation rate equals the growth rate of the quantity of money minus the growth rate of potential GDP-According to the Quantity Theory of Money, not only is V constant in the long-run, but potential output is constant as wellThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-Gr(P) = Gr(M) – Gr(Y*)-π = Gr(M) since Gr(Y*) = 0-Thus, the long-run equilibrium inflation rate equals the growth rate of the quantity of money, if potential GDP is constant-aggregate demand-The aggregate demand curve shows the relationship between the price level and the quantity of output demanded -We use a simple theory of aggregate demand based on the Quantity Theory of
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