After completing this chapter, students will be able to: See why inflation results from rapid growth in the money supply, learn the meaning of the classical dichotomy and monetary neutrality, see why some countries print so much money that they experience hyperinflation. | Review of the previous lecture Society faces a short-run tradeoff between unemployment and inflation. If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation. If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment. The Phillips curve illustrates the short-run relationship between inflation and unemployment. The greater the aggregate demand for goods and services, the greater is the economy’s output, and the higher is the overall price level. A higher level of output results in a lower level of unemployment. Review of the previous lecture The view that unemployment eventually returns to its natural rate, regardless of the rate of inflation, is called the natural-rate hypothesis. To reduce inflation, the Fed has to pursue contractionary monetary policy. To reduce inflation, an economy must endure a period of high unemployment and low output. Lecture 19 Money and Inflation- I . | Review of the previous lecture Society faces a short-run tradeoff between unemployment and inflation. If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation. If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment. The Phillips curve illustrates the short-run relationship between inflation and unemployment. The greater the aggregate demand for goods and services, the greater is the economy’s output, and the higher is the overall price level. A higher level of output results in a lower level of unemployment. Review of the previous lecture The view that unemployment eventually returns to its natural rate, regardless of the rate of inflation, is called the natural-rate hypothesis. To reduce inflation, the Fed has to pursue contractionary monetary policy. To reduce inflation, an economy must endure a period of high unemployment and low output. Lecture 19 Money and Inflation- I Instructor: Abbas Course code: ECO 400 Lecture Outline The connection between money and prices Money The quantity theory of Money The connection between money and prices Inflation rate = the percentage increase in the average level of prices. Price = amount of money required to buy a good. Because prices are defined in terms of money, we need to consider the nature of money, the supply of money, and how it is controlled. Money: Money is the stock of assets that can be readily used to make transactions. Money Money: functions of exchange we use it to buy stuff 2. store of value transfers purchasing power from the present to the future 3. unit of account the common unit by which everyone measures prices and values Money: types 1. fiat money has no intrinsic value example: the paper currency we use 2. commodity money has intrinsic value examples: gold coins, Money The money supply & monetary policy The money supply is the quantity of money available in the .
