Money, Output, and Prices in the Long Run Lesson 34 Sections 32, 33

Money, Output, and Prices Short Run and Long Run Effects of an Increase in the Money Supply

Money Neutrality In the long run, the theory is that any increase or decrease in the money supply will have a proportional effect on prices, therefore, changes in the money supply have no real effect.????? (John Maynard Keynes: “In the long run we are all dead”)

Changes in the Money Supply and the Interest Rates in the Long Run An increase in the money supply lowers rates, which increases demand, then that brings the interest rates back up again.

Money and Inflation The Classical Model of Money and Prices Money Neutrality (Adding money has no real effect) The Inflation Tax Because the government essentially creates money to pay it’s bills, this increases the money supply without adding goods, and this lowers the value of money, therefore making it a hidden tax. The Logic of Hyperinflation Because of the Inflation Tax, behaviors may change leading people to reduce the amount of currency they hold by buying durable goods or changing currencies, this leads to more money being printed, which lowers the value even more, which leads to dumping, which leads to more money being created and so on.

Moderate Inflation and Disinflation Cost Push Inflation Demand Pull Inflation The Output Gap and the Unemployment Rate The output gap is the difference between long range full employment and short run employment based on GDP When output is greater than long run aggregate supply, unemployment drops (inflationary gap) When output is lower than long run aggregate supply, unemployment raises (recessionary gap)

Demand Side vs Supply Side