1. Velocity & Real Income: More Realism

2. Rising Real Income  Increases in capital stocks  Increases in population  Increases in other factors of production  Rising productivity

3. More Goods  More goods & services coming into markets  Means more money must be spent to buy them  If V is slow to adapt, M must be expanded  Otherwise?

4. Recessions  Output shrinking => fewer goods and services, or at least a slowing growth rate, coming into markets  Again, if V is slow to adapt, the rate of growth of M can be slowed

5. Monetary Policy in Action  The central bank must be able to predict the cycles of y to adapt the money supply growth rate  M/y is a vital indicator  The task is impossible, but an approximation sometimes works

6. How Constant is V?  Assume inflation is 60%  If V = 6, as before, dollars sit 2 months between uses  At the end of 2 months, the dollars have lost 10% of their purchasing power.  Do dollars really sit for 2 months?

7. Expected Inflation  The operative variable is not inflation as measured, but inflation as expected by the public  Can that be measured?  No, but it can be estimated  It is a powerful operator

8. Expectations  What do you think happens to V if most people believe inflation is coming or getting worse?  OK, but why would so many people suddenly believe that?  This doesn’t “just happen”

9. Source of Inflation?  Remember what causes inflation  People are smart about their money  Professor Inflation  Rational expectations