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Contents
WHAT IS MONEY? ................................................................................................................................... 6
FUNCTIONS OF MONEY........................................................................................................................... 6
Medium of exchange........................................................................................................................... 6
Money is used as a unit of account. .................................................................................................... 7
Store of value/wealth .......................................................................................................................... 7
SUPPLY OF MONEY .............................................................................................................................. 9
A right shift of money supply represents an increase of MS ..................................................... 11
CREDIT CARDS VS MONEY ................................................................................................................. 12
DEMAND FOR MONEY .......................................................................................................................... 12
Motives of holding money .................................................................................................................... 12
1. Transaction motive................................................................................................................. 12
2. Precautionary Motive – .......................................................................................................... 13
3. Speculative purposes ............................................................................................................. 13
Factors affecting Money Demand (MD)............................................................................................ 13
Equilibrium in money market ............................................................................................................ 15
Monetary Policy ................................................................................................................................ 16
Impact of expansionary MP (increase of MS) ............................................................................... 16
SELF ASSESSMENT QUESTIONS ............................................................................................................. 17
MEASURING PERFOMANCE OF THE ECONOMY ................................................................................... 19
The Variables ..................................................................................................................................... 20
Defining GDP ..................................................................................................................................... 20
Ways of measuring GDP .................................................................................................................... 20
Expenditure Approach ................................................................................................................... 21
Consumption Approach ................................................................................................................. 21
Investment ..................................................................................................................................... 21
Stocks vs. Flows ............................................................................................................................. 22
Government Spending ................................................................................................................... 22
Exports and Imports ...................................................................................................................... 22
Value added....................................................................................................................................... 23
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Illustration...................................................................................................................................... 23
Final goods, value added, and GDP ............................................................................................... 24
Real vs. nominal GDP ..................................................................................................................... 24
The price level................................................................................................................................ 25
GDP Deflator .................................................................................................................................. 25
Consumer Price Index (CPI) ........................................................................................................... 25
Measuring Inflation ....................................................................................................................... 27
CPI vs. GDP Deflator ...................................................................................................................... 27
INCOME DETERMINATION:KEYNISIAN MODEL .................................................................................... 29
Assumptions ...................................................................................................................................... 29
Differences from the Classical Model .......................................................................................... 29
T h e Keynesian Model w/out Government ............................................................................... 29
T h e Keynesian Model w / Government ................................................................................... 39
SELF ASSESSMENT QUESTIONS ......................................................................................................... 43
AGGREAGATE DEMAND / AGGEREGATE SUPPLY MODEL .................................................................... 44
FACTORS THAT SHIFT AD ................................................................................................................... 44
SHIFTS IN AGGREGATE SUPPLY ......................................................................................................... 47
What will change LRAS? Same factors that shift the PPF ................................................................. 47
CHANGES IN THE SRAS ...................................................................................................................... 48
UNANTICIPATED INCREASES IN SRAS ................................................................................................ 49
UNANTICIPATED DECREASES IN SRAS ............................................................................................... 49
UNEMPLOYMENT, BUSINESS CYCLES AND INFLATION ............................ Error! Bookmark not defined.
The Business Cycle ............................................................................................................................ 51
III. Unemployment ...................................................................................................................... 54
Seasonal Unemployment .................................................................................................................. 55
Frictional Unemployment ................................................................................................................. 55
Structural Unemployment ................................................................................................................ 56
Cyclical Unemployment ........................................................................................................................ 56
Inflation ................................................................................................................................................. 58
Measuring Inflation .......................................................................... Error! Bookmark not defined.
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