Money Supply and Demand
- Price Level (P) - Measured using the CPI or GDP Deflator
- Value of Money = 1/P and this represents how much $1 is worth in terms of goods and services.
Example: If the price of a cookies $0.50 then the value of money is ________cookies. However, if the price of cookies increases to $2, now the value of money is ________cookies.
- If there is a monetary injection (increase in money supply) the price level will ________ and the value of a dollar will ________.
- Quantity Theory of Money - a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
- Nominal Variables - variables measured in monetary units
- Real Variables - variables measured in physical units. Example: If the price of books are $20 and price of shirts are $40 those are ________ prices. The real (or relative) price of one shirt is ________ books.
- Classical Dichotomy - the theoretical separation of nominal and real variables
- Monetary Neutrality - the proposition that changes in the money supply do not affect real variables. From the example above, if money supply increases and the prices of both products double to $40 for books and $80 for shirts, the real price of one shirt is still ________ books.