Clear English summary of chapter 6 and 7 of the book Burda & Wyplosz. Conveniently divided by section and key terms are in bold. Part of the examination of, among other things the first year of Economics and Business, Fiscal Economics and Mr.drs. program. FEB11002 Macroeconomics.
Chapter 3 The Fundamentals of Economic Growth summary (FEB11002 Macro-economie)
Chapter 5 Labour Markets and Unemployment summary (FEB11002 Macro-economie)
All for this textbook (10)
Written for
Erasmus Universiteit Rotterdam (EUR)
Accountancy and Financial Management
Macro-economie
All documents for this subject (11)
1
review
By: jarrydbarker • 7 year ago
Seller
Follow
SophieEUR
Reviews received
Content preview
Chapter 6: Money, Prices, and Exchange rates in the Long Run
1. Overview
Exchange rate = the price of our money in terms of other monies.
Nominal exchange rate = the price of one money in terms of another
Real exchange rate = tries to address the notion of what money can actually buy in the
two countries being compared. It involves adjusting the nominal exchange rate for price
levels at home and abroad.
2. Money and the Neutrality Principle
Neutrality principe = suggest that prices and the nominal exchange rate should grow at the
same rate as money (in the long run).
Assume that people hold cash as a proportion k of their income in each period, measured in
money units. For a country as a whole, total income is measured by GDP. Denoting the real
GDP as Y and the price level P, the nominal GDP is PY, so we now state that the total
demand for money, denoted M, is proportional to the nominal GDP:
M = kPY
This equation is known as the Cambridge equation (= demand for money equation).
Since the purchasing power of money is inversely proportional to the price level, it can be
written as the ratio M/P. This is also called real value of money (or real money). M/P
measures the purchasing power of the money stock M. So:
M/P = kY
! The monetary neutrality principle says that, in the long run, real GDP is unaffected (money
has no long-run effect on output, and more generally, has no long-run effect on any real
variable).
The neutrality principle implies that inflation π is equal to the growth rate of money:
π = ∆M/M (inflation = money growth) (*6.3)
This is because if the nominal money stock M doubles, the left side of (M/P) = kY also
doubles, all other things equal. The right-hand side remains unchanged – because of the
monetary neutrality principle. So this equation can only work if k or P changes. K is constant,
so P must perform the balancing act.
- Supply of money by the central bank (S)
- Demand for money by the private sector (D)
Money market equilibrium occurs when the
supply equals demand. An increase in the
nominal money supply is met by a proportional
increase in the price level.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller SophieEUR. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.22. You're not tied to anything after your purchase.
