Chp 30

Chapter 30 is on money growth and inflation. The phenomenon in which prices fall over a period of time is called deflation. Prices in recent history have had a substantial variation in the rate at which prices rise. The first insight about inflation is that it is more about the value of money than about the value of goods. Inflation is an economy-wide phenomenon that concerns, first and foremost, the value of the economy's medium of exchange. If p is the price of goods and services measured in terms of money, 1/p is the value of money measured in terms of goods and services. When the overall price level rises, the value of money falls. The supply and demand for money determines the value of money. The demand for money reflects how much wealth people want to hold in liquid form. The quantity of money demanded depends on the interest rate that a person could earn by using the money to buy an interest bearing bond rather than leaving it in a wallet or low-interest checking account.One variable that stands out in importance that affect the demand for money is the average level of prices in the economy. A higher price level (a lower value of money)increases the quantity of money demanded. The time horizon is what ensures that the quantity of money the Fed supplies balances the quantity of money people demand. In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply.