1. Concepts
By Stella

2. MS and Inflation? Theoretically, with inflation currency depreciates
Growth rate of Ms -> inflation rate
Inflation: when Ms rises faster than the stock of goods and services available

3. Deflation?
Overall decrease in the level of prices

4. Exchange Rate? What is it? How is it set?
Literally, rate at which one can convert one currency into another currency
Allows one to compare the relative prices of goods and services in different countries
How is it set?
Law of Supply and Demand (S-D)
Subjective valuation: over/undervalued

5. Exchange Rate? – cont’d
Appreciated: more of another currency / ea. domestic currency
Ex: Spot X-rate
Rate on a particular day -> reported daily
Amount of foreign currency one domestic currency (ex: $1 U.S.) will buy
Value of a domestic currency (ex: $1) for one unit of foreign currency
Ms-Md of one currency relative to those of other currencies

6. Exchange Rate? – cont’d Pegging Free-floating Currency boards
Usually to the U.S. dollar
Low inflation
ex: Chinese Yuan
Free-floating
Market-based
Currency boards
Backing up the amount of money printed with foreign reserves

7. Inflation? Increase in the overall level of prices
Basically, caused by excessive supply of money in the market
Quantity theory of money:
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determined the inflation rate

8. Inflation? – cont’d Excessive MS -> Value of money falls
Price level as a measure of the value of money :
lower value of money, higher price for a certain good
Hence, excessive MS -> decreased value of money -> increased price level

9. Inflation – cont’d
Supposedly, with the higher price level, people would want more money to conduct transactions (MD increases)
MD rises (and so does the price) until it reaches market equilibrium.

10. Ref. International Business: competing in the global marketplace, Hill
Macroeconomics, Bernanke et al.
Principles of Economics, Menkiw