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### 24 Cards in this Set

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 alternatively, we can view the price level as a measure of the value of money nb nb in the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply nb nb if the PRICE LEVEL is above the equilibrium level, ppl will want to hold more money than the fed has created so the Price level must FALL to balance S&D if the PRICE LEVEL is below the equilibruim level ppl will want to hold less money than the fed has created and the prive level must rise to balance S&D quantity theory of money a theory asserting that the quantity of money available determines the price level and the growth rate in the quantity of money available determines the inflatoin rate nominal variables variables measured in monetary units real variables variables measured in physical units 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 velocity of money the rate at which money changes hand velocity of money= v= (price level*y)/quanity of money (p*y)/M quantity equation m*v=p*y which relates the quantity of money the velocity of money and the dollar value of the economy's output of G and S Elements necessary to explain equilibrium price level and inflation rate (1) the velocity of money is relatively stable over time Elements necessary to explain equilibrium price level and inflation rate (2) because velocity is stable, when the central bank changes the quantity of money (M), it causes proportionate changes in the nominal value of output elements necessary to explain equilibrium price level and inflation rate (3) b/c money is neutral money does not affect output elements necessary to explain equilibrium price level and inflation rate (4) WITH OUTPUT (Y) determined by factor supplies and technology when the central bank alters the money supply (m) and induces proportional changes in the nominal value output (p*Y) -these changes are reflected in the changes in the price level (p) elements necessary to explain equilibrium price level and inflation rate (5) therefor when the central bank increases the money supply rapidly, the result is a high rate of inflation inflation tax the revenue the govt raises by creating money -a tax on eveyone who has money fisher effect the one for one adjustment of the nominal interest rate to inflation rate when the fed increases the rate of money growth, the result is... a higher inflation rate and a higher nominal interest rate inflation itself does not reduce ppls real purchasing power nb nb shoeleather costs the resources wasted when inflation encourages ppl to reduce their money holdings menu costs the costs of changing prices because of inflation induced tax changes, higher inflation tends to discourages ppl from saving nb nb