tailieunhanh - Ten Principles of Economics - Part 62

Ten Principles of Economics - Part 62. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 28 MONEY GROWTH AND INFLATION 631 checking accounts. That is a higher price level a lower value of money increases the quantity of money demanded. What ensures that the quantity of money the Fed supplies balances the quantity of money people demand The answer it turns out depends on the time horizon being considered. Later in this book we will examine the short-run answer and we will see that interest rates play a key role. In the long run however the answer is different and much simpler. In the long run the overall level of prices adjusts to the level at which the demand for money equals the supply. If the price level is above the equilibrium level people will want to hold more money than the Fed has created so the price level must fall to balance supply and demand. If the price level is below the equilibrium level people will want to hold less money than the Fed has created and the price level must rise to balance supply and demand. At the equilibrium price level the quantity of money that people want to hold exactly balances the quantity of money supplied by the Fed. Figure 28-1 illustrates these ideas. The horizontal axis of this graph shows the quantity of money. The left-hand vertical axis shows the value of money 1 P and the right-hand vertical axis shows the price level P. Notice that the price-level axis on the right is inverted A low price level is shown near the top of this axis and a high price level is shown near the bottom. This inverted axis illustrates that when the value of money is high as shown near the top of the left axis the price level is low as shown near the top of the right axis . The two curves in this figure are the supply and demand curves for money. The supply curve is vertical because the Fed has fixed the quantity of money available. The demand curve for money is downward sloping indicating that when the value of money is low and the price level is high people demand a larger quantity of it to buy goods and services. At the .

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