EC140 Lecture Notes - Lecture 16: Human Capital, Monetary Reform, Aggregate Supply
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When interest rates increase, people hold less money. If real gdp increases, number of inancial transacions increases. If price level increases, more money is needed to keep real value of transacions. Graphed in terms of interest rates (price) and quanity of money. Changes in supply/demand for money afect interest rate. Changes in interest rates afects consumpion and investment. Doubling bank deposits, value of cash, and prices would have no efect. Key to efecibe monetary policy is slow adjustment of prices. Change in aggregate expenditure and aggregate demand, which causes . Increase in real gdp, and inlaionary gap, which causes . Increase in wages and input prices, which causes . Investment and technology may respond to efecive monetary policy. Human capital may be signiicantly reduced by recessionary gaps. Monetary policy to eliminate recessionary gaps may have long-term value. In theory, increasing money supply should lead to long-term increases in price level. Inlaionary gaps would lead to increasing input prices.
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