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Quantity Theory of Money
States that Money is a medium of exchange, and prices increases when Money Supply Increases.
MsV=PQ
Price Level x Real Value of Final Output
If M increases and V and Q remains constat, then P will rise
Inflation
If M decreases or V slows down, it can lead to?
Deflation or Lower Inflation
Price Level
General Price of G&S in the economy
Velocity of Money
Number of times money changes hand
Philips Curve
shows relationship between Unemployment Rate and the annual rate of increase in Price Level.
Implications of Price Changes:
V is assume constant in the short run due to:
Institutional Rigidities
Implications of Price Changes:
Since firms and households do not need to hold additional money they? ½
Spend the money.
Implications of Price Changes:
If the economy is at FULL EMPLOYMENT? 2/2
additional demand bids the prices up.
