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 * Velocity=Price*Output

7. Quantity Theory of Money Money * Velocity=Price*Output 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 y P yd = M S / (k*P) P1 P2 y1y2

13. Equilibrium Price and Output y P yd = M S / (k*P) P1 y1 ysys

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 y P yd = M S / (k*P) P1 y1 y s1

17. Supply Side Inflation y P yd = M S / (k*P) P1 y1 y s1 y s2 y2 p2

18. Demand Side Inflation y P yd1 = M S / (k*P) P1 y1 y s1

19. Demand Side Inflation y P yd1 = M S / (k*P) P1 y1 y s1 yd2 = M S / (k*P) P2

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.