Chapter 7: Asset Market Equilibrium Flashcards
1
Q
Why is there a close relationship between money and the price level?
A
Inflation tends to be a monetary phenomenon. Assuming that the real interest is at equilibrium (Goods Market), inflation expectations are fixed and in line with actual inflation, and the economy is at full employment (constant real income), money demand becomes constant, and therefore, the price level only changes in response to changes in the exogenously determined nominal money stock.
