Money, Prices And Exchange Rates In The Long Run Flashcards
1
Q
What is the Cambridge equation?
A
M=kPY money demand is a proportion of nominal GDP
2
Q
What is the equation for purchasing power?
A
M/P=kY
3
Q
How do we work out inflation?
A
Inflation= money growth-GDP growth
4
Q
How do we work out real exchange rates?
A
Real exchange rate=(nominal exchange rate x domestic price)/foreign price
5
Q
What is the equation for the change in real exchange rates?
A
Change in nominal exchange rate + domestic inflation - foreign inflation
6
Q
What is the neutrality principle?
A
Changes in aggregate money supply only effect nominal variables, rather than real variables. An increase in money supply would increase prices and wages proportionately.
