1. Principles of Macroeconomics ECON 401
Dr. Andrew L. H. Parkes
“A Macroeconomic Understanding for use in Business”
卜安吉

2. Chapter 30: Money Growth and Inflation
What is the relationship between money and prices?
Know the equation of exchange 
Also called the Quantity Equation
% D M + % D V = % D P + % D Y
Principles of Macroeconomics, Day 10

3. Principles of Macroeconomics, Day 10
Chapter 30
What is the Classical Dichotomy?
The Separation of Real and Nominal Variables
That is: variables measured in money - nominal
Versus variables measured in physical units (real)
The price of rice is 1 yuan/bowl – nominal
The price of rice is ½ ear of corn – real
Principles of Macroeconomics, Day 10

4. Principles of Macroeconomics, Day 10
Chapter 30
Monetary Neutrality
Changes in the Money Supply do NOT affect REAL variables
Only prices are affected
David Hume’s world – accepted as the LONG RUN view of the economy
Principles of Macroeconomics, Day 10

5. Principles of Macroeconomics, Day 10
The Velocity of Money
How many times does money change hands? OR
How often does the same 10 yuan bill go through your hands?
Principles of Macroeconomics, Day 10

6. Principles of Macroeconomics, Day 10
Hyperinflation
Yugoslavia – last decade’s example
Zimbabwe – the current example (NY Times)
Principles of Macroeconomics, Day 10

7. Principles of Macroeconomics, Day 10
Hyperinflation
How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417.
No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750 — in American currency, about 69 cents.
The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe's $500 bill, now the smallest in circulation.
Principles of Macroeconomics, Day 10

8. Principles of Macroeconomics, Day 10
Hyperinflation
From Greg Mankiw’s Blog:
“The trigger of this crisis — hyperinflation — reached an annual rate of 1,281 percent this month, and has been near or over 1,000 percent since last April. Hyperinflation has bankrupted the government, left 8 in 10 citizens destitute and decimated the country’s factories and farms.”
Principles of Macroeconomics, Day 10