Macro 14
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Good money maintains its value over time, while bad money loses value through inflation. The quantity theory of money states that inflation is caused by increasing the money supply faster than the production of goods and services. Inflation redistributes wealth from lenders to borrowers and causes tax bracket creep as wages increase nominally but not real wages. The aggregate demand-aggregate supply model shows the relationship between inflation, real GDP, and shifts in money supply, velocity of money, aggregate demand, and short-run and long-run aggregate supply.
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Macro 14
- 3. Quiz What is the difference between good money and bad money?
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- 12. 2008 2018
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- 15. Inflation Cause: Printing money faster than making goods and services Effect: Rising prices
- 16. Nominal vs. Real
- 17. P2 - P1 P1 x 100 Inflation Rate
- 20. Quantity Theory of Money M = Money Supply v = velocity P = Price Level YR = Real GDP
- 21. v = velocity The average number of times a dollar is used to purchase final goods and services within a year
- 22. Mv = PYR Assume v andYR are constant M = P
- 23. M = P Inflation is everywhere and always a monetary phenomenon - Milton Friedman
- 25. 1834 to 1933 $1 =1/20 oz of gold $20 = one oz of gold
- 26. $1,320 66x paper currency has loss of 98.5% of value
- 27. Costs of Inflation uncertainty illusion redistribution tax bracket creep
- 30. Redistribution public to government lenders to borrowers
- 31. Redistribution nominal = real + inflation real can be negative
- 33. Who wins? Inflation Winners Losers Lower than Expected Lenders Borrowers Higher than Expected Borrowers Lenders
- 34. Tax Bracket Creep 10% 20% Higher tax bracket Pay more but not earn more
- 35. Macroeconomics Business Fluctuations Aggregate Supply & Demand Chapter 13
- 36. Real GDP Growth Rate 3.2%
- 39. Mv = PYR Rates M + v = P +YR
- 40. M + v = P +YR M + v = Inflation + Real Growth 5% + 0% = Inflation + 0%
- 41. 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% -2% 0% 2% 4% 6% Aggregate Demand AD = M +V = 5%P Inflation Rate Y - Real GDP Growth Rate 5% = P +Y AD = 7%
- 42. 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% -2% 0% 2% 4% 6% Aggregate Demand P Inflation Rate Y - Real GDP Growth Rate
- 43. Quiz If %∆M (Money)is growing at 4% and %∆V (Velocity) is growing at 2%, create a graph to show the aggregate demand curve for the growth rate for %∆P (inflation) and %∆Y (GDP).
- 44. %∆M + %∆V = 6% = %∆P + %∆Y 6% 6%0% 0% %∆P Inflation π %∆Y GDP Aggregate Demand
- 46. Aggregate Supply Curve Two Curves Short Run Long Run
- 47. Two Supply Curves Short Run Long Run
- 48. Short Run Adrenaline Give 110% Push to exceed normal capacity
- 49. Long Run Run out of Adrenaline Fall back to normal Cannot do 110% forever unless.....
- 50. Long Run Supply Curve New Capital Human Physical Intellectual Financial Cultural
- 51. Price Level Quantity of Output Two Supply Curves Short-Run Aggregate Supply Long-Run Aggregate Supply Price change does not affect the quantity of goods and services P
- 52. New Capital Human Physical Intellectual Financial Cultural Price Level Quantity of Output Two Supply Curves LRAS1 Y1 LRAS2 Y3 LRAS3 Y3
- 53. New Capital Human Physical Intellectual Financial Cultural Price Level Quantity of Output Two Supply Curves LRAS1 Y1 LRAS2 Y3 LRAS3 Y3 P1 P2 P3
- 54. Price Level Real GDP orY AD- AS Model Aggregate Demand Short Run Aggregate Supply Long Run Aggregate Supply LRAS Shape -Vertical Capacity fixed Shift Physical Financial Human Intellectual Cultural SRAS Shape - Slope Up Sticky Wages Sticky Prices Misperceptions Shift Physical Financial Human Intellectual Cultural Expectations AD Shape - Slope Down Wealth Effect Interest Effect Exchange Effect Shift Consumption Investment Government Net Exports Money Supply