5.3: Money Growth and inflation

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5 Terms

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Velocity of money

The average times a dollar is spend and re-sent in a year

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The quantity theory of money

MV=PY

M- money supply

V- velocity of money (relatively constant because spending habits rarely increase)

P-price level

Y- quantity of output (not affected by Q of money; productivity measured, not value)

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Price level x quantity of output=

Nominal GDP

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In the long run, when central bank increases the money supply

IR decrease, AD increase which leads to higher resource prices and inflation and if it gets high enough, banks do not lend and the economy tanks.

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Why do economists support expansionary monetary policy

While it increases real output in the short run it does not impact long run.