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bben Wrote:
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> but for me price level and inflation are linked
> (if not the same) so how can they have opposite
> effect on demand for money
>



inflation and price level are NOT the same. inflation is a persistent increase in price level. the price level can increase, but not persistently increase. big difference.

increase in price level will lead to more money demanded - things cost more.

with high inflation the nominal rate increases, hence the cost of holding money increases so investors will demand less by investing excess cash to earn the higher rates.

inflation is longer term, price level can jump up and then back down.



Edited 1 time(s). Last edit at Thursday, November 18, 2010 at 10:42PM by BayStreet.