1. Lectures in Macroeconomics- Charles W. Upton Qualifications to the Quantity Theory

2. The Christmas Eve Caper P r Y M PoPo roro

3. Qualifications to the Quantity Theory The Solution P r Y M PoPo roro 2P o Y’ M’

4. Qualifications to the Quantity Theory The Neutrality of Money P r Y M PoPo roro 2P o Y’ M’ Money is Neutral

5. Qualifications to the Quantity Theory The Neutrality of Money P r Y M PoPo roro 2P o Y’ M’ Money is Neutral (But not always)

6. Qualifications to the Quantity Theory A Little Change P r Y M PoPo roro 2P o Y’ M’ Suppose we modify our assumption, so that there are assets denominated in money terms.

7. Qualifications to the Quantity Theory Effects on the Y curve P r Y M PoPo roro 2P o Y’ M’ The Y curve still shifts up and to the right

8. Qualifications to the Quantity Theory Effects on the M curve P r Y M PoPo roro 2P o Y’ M’ The M curve still shifts up and to the left

9. Qualifications to the Quantity Theory Equilibrium P r Y M PoPo roro 2P o Y’ M’ The price level will be higher. The effect on the interest rate is uncertain.

10. Qualifications to the Quantity Theory The Long Run Solution P r Y M PoPo roro 2P o Y’ M’

11. Qualifications to the Quantity Theory Conclusions P r Y M PoPo roro 2P o Y’ M’ This is one case when the quantity theory does not work perfectly. Money is not exactly neutral

12. Qualifications to the Quantity Theory Conclusions P r Y M PoPo roro 2P o Y’ M’ This is one case when the quantity theory does not work perfectly. Money is not exactly neutral Given time for things to adjust, it works very well.

13. Qualifications to the Quantity Theory Another Exception The Christmas Eve Caper becomes permanent Distributions no longer in proportion to money holdings. There will come a day when people realize this is permanent.

14. Qualifications to the Quantity Theory Changes in Expectations P r Y M PoPo roro 2P o Y’ M’ M”

15. Qualifications to the Quantity Theory Changes in Expectations P r Y M PoPo roro 2P o Y’ M’ M” Changed inflationary expectations changes η e and hence r n. M curve shifts to M”

16. Qualifications to the Quantity Theory The Friedman Surge P r Y M PoPo roro 2P o Y’ M’ M” Thus even higher inflation, the Friedman surge.

17. Qualifications to the Quantity Theory The Friedman Surge Milton Friedman

18. Qualifications to the Quantity Theory What determines inflationary expectations?

19. Qualifications to the Quantity Theory What determines inflationary expectations?

20. Qualifications to the Quantity Theory Rational Expectations Inflationary Expectations Include all Information

21. Qualifications to the Quantity Theory Rational Expectations Inflationary Expectations Include all Information

22. Qualifications to the Quantity Theory How to measure  e US Treasury Rate r N  r R +  e Rate on Indexed Bonds r R Difference is  e

23. Qualifications to the Quantity Theory End ©2003 Charles W. Upton. All rights reserved