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What is money?

What is money?. Money is a generally acceptable liquid asset that could be used to discharge liability. Functions of money are:. medium of exchange. Functions of money are:. medium of exchange unit of account. Functions of money are:. medium of exchange unit of account

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What is money?

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  1. What is money? Money is a generally acceptable liquid asset that could be used to discharge liability.

  2. Functions of money are: • medium of exchange

  3. Functions of money are: • medium of exchange • unit of account

  4. Functions of money are: • medium of exchange • unit of account • store of value

  5. Functions of money are: • medium of exchange • unit of account • store of value • Standard of deferred payment

  6. Quantity Theory of Money Money * Velocity=Price*Output

  7. Quantity Theory of Money Money * Velocity=Price*Output M *V =P *y

  8. Quantity Theory of Money: Cambridge Equation Named after Alfred Marshall of Cambridge University in England. (M d/P) = k *y Where k=(1/P)

  9. Quantity Theory of Money: Cambridge Equation Named after Alfred Marshall of Cambridge University in England. (M d/P) = k *y where: M d = Money demand k = fraction of income that people hold as money y = real output of goods and services

  10. Quantity Theory of Money: Cambridge Equation Named after Alfred Marshall of Cambridge University in England. (M d/P) = k *y M d = k * P * y

  11. Quantity Theory of Money: Cambridge Equation In equilibrium, demand and supply of money must be equal. M s = M d M d = k * P * y M s = k * P * y or y d = M s / k * P

  12. Aggregate Demand P P1 P2 yd = MS / (k*P) y y1 y2

  13. Equilibrium Price and Output ys P P1 yd = MS / (k*P) y y1

  14. Causes of Inflation in the Classical Model Inflation could come from • Supply side

  15. Causes of Inflation in the Classical Model Inflation could come from • Supply side • Demand side

  16. Supply Side Inflation ys1 P P1 yd = MS / (k*P) y y1

  17. Supply Side Inflation ys2 ys1 P p2 P1 yd = MS / (k*P) y y2 y1

  18. Demand Side Inflation ys1 P P1 yd1 = MS / (k*P) y y1

  19. Demand Side Inflation ys1 P P2 P1 yd2 = MS / (k*P) yd1 = MS / (k*P) y y1

  20. Neutrality of Money Variation in the money supply does not influence real variables (real sector) of the economy such as output and employment. It only affects price level.

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