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

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

3. 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”)

4. 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.

5. 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.

6. 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)

7. Demand Side vs Supply Side