# Chapter 8 money the price level and inflation relationship

Start studying Chapter 8- Money/Price Level/Inflation. 2) Unit of account .. the relationship b/w the quantity of real money demanded and the nominal interest. Start studying Macroeconomics Chapter 8 The Price Level and Inflation. specifies the long-run relationship between the money supply, the price level, real. of this relation diminishes as a country's money growth rate and inflation rate the nominal quantity of money, M; the price level, P; the quantity of labor input, L; the The procyclical patterns for L, w/P, and Y/L come from Chapters 8 and 9.

The quantity of money increases.

### Ch. 8: Money, the Price Level, and Inflation - ppt download

New money is used to make payments. Some of the new money remains on deposit. Some of the new money is a currency drain. Desired reserves increase because deposits have increased. Excess reserves decrease, but remain positive. Figure in the next slide illustrates the process and keeps track of the numbers. The Influences on Money Holding The quantity of money that people plan to hold depends on four main factors: Nominal money is the amount of money measured in dollars.

The quantity of nominal money demanded is proportional to the price level—a 10 percent rise in the price level increases the quantity of nominal money demanded by 10 percent. A rise in the nominal interest rate on other assets decreases the quantity of real money that people plan to hold.

### 25 CHAPTER Money, the Price Level, and Inflation. - ppt video online download

Real GDP An increase in real GDP increases the volume of expenditure, which increases the quantity of real money that people plan to hold. The Demand for Money The demand for money is the relationship between the quantity of real money demanded and the nominal interest rate when all other influences on the amount of money that people wish to hold remain the same.

A rise in the interest rate brings a decrease in the quantity of real money demanded. A fall in the interest rate brings an increase in the quantity of real money demanded. An increase in real GDP increases the demand for money and shifts the demand curve rightward. The graph interprets the data in terms of movements along and shifts in the demand for money curve.

Adjustments that occur to bring about money market equilibrium are fundamentally different in the short run and the long run. The Fed adjusts the quantity of money each day to hit its interest rate target. This action lowers the interest rate. They try to get more money by selling bonds.

This action raises the interest rate. Nominal interest rate equals the equilibrium real interest rate plus the expected inflation rate.

When the Fed changes the nominal quantity of money, the price level changes in the long run by the same percentage as the percentage change in the quantity of nominal money. In the long run, the change in the price level is proportional to the change in the quantity of nominal money.

The quantity theory of money is based on the velocity of circulation and the equation of exchange. The velocity of circulation is the average number of times in a year a dollar is used to purchase goods and services in GDP. The balance sheet Assets Liabilities Cash 90 m. The balance sheet requires that total assets equal total liabilities.

Bank can increase demand deposits by creating new loans to customers until it no longer has any excess reserves.

Summary of money creation process. The Fed buys sells government securities in the open market to increase decrease the money supply.

## Ch. 8: Money, the Price Level, and Inflation

The Fed loans reserves to member banks and charges the discount rate. The Fed sets the required reserve ratio. If the Fed wants to increase the amount of bank reserves buy government securities from member banks banks give up government bonds and receive deposit at the Fed or cash.

More recently, Fed has purchased commercial paper from banks — new policy! By buying government securities Fed created new reserves that multiply into new loans and demand deposits remember the deposit multiplier.

If the Fed sold government securities, reserves and M1 would decrease. Demand deposits m.

## 25 CHAPTER Money, the Price Level, and Inflation.

What is the effect on: The higher the discount rate, the less likely banks are to borrow reserves to increase the money supply. The federal funds rate is the interest rate that banks charge each other for a loan of reserves. The federal funds rate tracks the discount rate fairly closely. If the Fed wants to increase reserves in the system, it would lower the discount rate. The type of deposits people make. Bank holdings of excess reserves 34 Changes in the money supply: Of DD as cash.

Loans Demand deposits M1 35 May 25, Consists of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and the 11 presidents of other regional Federal Reserve banks of whom, on a rotating basis, 4 are voting members. The FOMC meets every six weeks to formulate monetary policy.

M2 M1 plus time deposits, savings deposits, and money market mutual funds and other deposits. The balance sheet AssetsLiabilities Cash90 m. The balance sheet requires that total assets equal total liabilities. Summary of money creation process. If the Fed sold government securities, reserves and M1 would decrease. What is the effect on: None of the above. The higher the discount rate, the less likely banks are to borrow reserves to increase the money supply.

The federal funds rate tracks the discount rate fairly closely. Of DD as cash. The Fed increases the required reserve ratio 2. The Fed purchases government securities 3. The public decides to hold less money as demand deposits and more as cash 4.

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