Ch 5 - Classical theory Flashcards
What is the equation of exchange?
MV=PT
What is velocity of circulation?
Number of times each unit of money is used in transactions per period
Name 3 assumptions in the quantity theory of money
- V is taken as exogenous
- M is determined by the gov/CB
- T is determined by real variables such as preferences, endowments and technology
If V and T are considered exogenous, the growth rate of money supply is equal to _____
Inflation
What does velocity of money measure?
How many times a unit of money is used to purchase goods and services per period. It is also a stability of the money demand
What are some determinants of the velocity of money?
Frequency of payment, individual habits and spending patterns, efficiency of the payments system and int rate.
There’s generally an _______ relationship between money holdings and the velocity of money
Inverse
The equation of exchange is a _____- equation and the Cambridge school under Marshall transformed it into a ________
Flow, stock
What does the Cambridge view of the quantity theory depict?
Amount of money one held was equal to a proportion k of nominal GDP (PY) where k=1/V
What is meant by the Classical dichotomy?
Only real variables determined real outcomes
What is money neutrality?
The quantity of money determined the absolute price level or the value of goods in terms of monetary units ( from the equation of exchange). Money is neutral, in the sense that the quantity of it has no effect on any real variables in the economy.
What does Say’s law say?
Supply creates its own demand. Thus if there’s an excess demand for one good, there must be an excess demand for another. However, there can be no general gluts
What does Walras’ law say?
In market for n-1 goods, if there’s eqm for n-2 markets, there must be eqm in the n-1 th market
When the velocity of money is high, fiscal and monetary policy are _______ effective
More
Why is money included in the utility function of households?
The more money households hold, the greater the extent to which households can purchase goods ahead of making sales. Money holdings stand as a proxy for the more convenient sequence of transactions they make possible.
