Lectures in Macroeconomics- Charles W. Upton

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The Christmas Eve Caper

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The Solution

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The Neutrality of Money

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Money is Neutral

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The Neutrality of Money

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Money is Neutral(But not always)

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A Little Change

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Suppose we modify our

assumption, so that there are assets denominated in money terms.

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Effects on the Y curve

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The Y curve still shifts up and to

the right

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Effects on the M curve

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The M curve still shifts up and to the left

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Equilibrium

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The price level will be higher. The effect on the interest rate is uncertain.

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The Long Run Solution

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Conclusions

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M’This is one case when the quantity theory does not work perfectly. Money is not exactly neutral

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Conclusions

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M’This is one case when the quantity theory does not work perfectly. Money is not exactly neutral

Given time for things to adjust, it works

very well.

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Another Exception

• The Christmas Eve Caper becomes permanent

• Distributions no longer in proportion to money holdings.

• There will come a day when people realize this is permanent.

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Changes in Expectations

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Changes in Expectations

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Changed inflationary expectations changes ηe and hence rn.

M curve shifts to M”

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The Friedman Surge

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Thus even higher inflation, the Friedman surge.

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The Friedman Surge

Milton Friedman

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What determines inflationary expectations?

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What determines inflationary expectations?

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Rational Expectations

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Inflationary Expectations Include all Information

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Rational Expectations

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Inflationary Expectations Include all Information

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How to measure e

• US Treasury Rate

rN rR + e

• Rate on Indexed Bonds

rR

• Difference is e

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End

©2003 Charles W. Upton. All rights reserved