4. Money and Prices

In micro, a price was an exchange ratio between two goods; in macro, the price level — all prices bundled into one number — and money, the ruler that measures it, take center stage. Can the price level rise while no relative price moves? If money doubles, do only prices double? The price level and the equation of exchange plant the seed of money neutrality.

• A Price Is a Ratio; the Price Level Is a Level — In micro, a price was an exchange ratio between two goods. In macro, the average of all prices — the price level — appears as its own object. If only ☕ coffee gets pricier, the basket really changes. Shoppers shift toward what stayed cheap. But suppose every price and every paycheck double. What people buy stays exactly the same. Only the money handed over doubles. For example, at the 🏪 stationery shop a ✏️ pencil costs 100 won and an eraser 200 won. If both prices double and your 💰 allowance doubles too, you can buy the very same set as before.
• The Equation of Exchange and Neutrality — In micro, money barely appeared; barter ran the markets. In macro, money moves to the center. Double the money and prices double too. The pile of real goods does not grow. As the equation below says, money only rescales the ruler. Inflation is money growth minus real growth. For example, ten 🧑 classmates share ten 🍬 candies. If the 💰 paper money with candy pictures doubles, each candy just costs twice as much.