What is money

1
What is money?

• Money is a generally acceptable liquid asset that
  could be used to discharge liability.

2
Functions of money are

• medium of exchange

3
Functions of money are

• medium of exchange
• unit of account

4
Functions of money are

• medium of exchange
• unit of account
• store of value

5
Functions of money are

• medium of exchange
• unit of account
• store of value
• Standard of deferred payment

6
Quantity Theory of Money

• Money VelocityPriceOutput

7
Quantity Theory of Money

• Money VelocityPriceOutput
• M V P y

8
Quantity Theory of Money Cambridge Equation

• Named after Alfred Marshall of Cambridge
  University in England.
• (M d/P) k y
• Where k(1/P)

9
Quantity Theory of Money Cambridge Equation

• Named after Alfred Marshall of Cambridge
  University in England.
• (M d/P) k y
• where
• M d Money demand
• k fraction of income that people hold as
  money
• y real output of goods and services

10
Quantity Theory of Money Cambridge Equation

• Named after Alfred Marshall of Cambridge
  University in England.
• (M d/P) k y
• M d k P y

11
Quantity Theory of Money Cambridge Equation

• In equilibrium, demand and supply of money must
  be equal.
• M s M d
• M d k P y
• M s k P y
• or
• y d M s / k P

12
Aggregate Demand

• P

P1
P2
yd MS / (kP)
y
y1
y2
13
Equilibrium Price and Output

• P

ys
P1
yd MS / (kP)
y
y1
14
Causes of Inflation in the Classical Model

• Inflation could come from
• Supply side

15
Causes of Inflation in the Classical Model

• Inflation could come from
• Supply side
• Demand side

16
Supply Side Inflation

• P

ys1
P1
yd MS / (kP)
y
y1
17
Supply Side Inflation

• P

ys1
ys2
p2
P1
yd MS / (kP)
y
y1
y2
18
Demand Side Inflation

• P

ys1
P1
yd1 MS / (kP)
y
y1
19
Demand Side Inflation

• P

ys1
P2
P1
yd2 MS / (kP)
yd1 MS / (kP)
y
y1
20
Neutrality of Money

• Variation in the money supply does not influence
  real variables (real sector) of the economy such
  as output and employment. It only affects price
  level.