Ch 7 Flashcards
What is the only way consumers can spend more on all goods?
there must be more dollars available to spend
What does the equation of exchange show?
the relationship between prices and the money supply
MV=
PQ
What does M, P and Q stand for?
money supply, price levels, the amount of output produced by the economy
What is velocity?
The number of times a dollar is turned over
What is PQ?
the amount spent on the output at the current price level (the total amount of spending in the economy)
What does MV=PQ mean?
the output in the economy is bought by the money supply, which is spent and re-spent at a rate of V (This is the interpretation of the equation of exchange)
Who created MV=PQ?
John Stuart Mill, just about no economist disagrees with him and it was put into a formula in the 1900s by Irving Fisher
Who created the simple quantity theory?
Irving Fisher and Ludwig Von Mises
What does the simple quantity theory start off with and observe?
The equation of exchange
1) Over a short time period resources are limited, so output is limited
2) The speed at which money moves through the economy is limited
What does the quantity theory assume?
in the short run, velocity and output are constant, just numbers that can not change
What is the result of the simple quantity theory?
the price level and the money supply are proportionally related
Where does inflation come from?
In our economy, inflation comes from the Fed and the banking system increasing the money supply
Who founded the monetarist school of economics?
Milton Friedman
What does monetarism begin with and assume?
the equation of exchange and then softens the assumptions of the simple quantity theory
What did Friedman say about velocity?
He said that velocity is not fixed, but instead does not change much and is predictably stable
What did Friedman think about output?
He didn’t think that output was fixed and the economy has a potential that it tends to move toward. Free markets work towards equilibrium in which labor demanded is equal to labor supplied
What is the first problem of inflation?
firms can not make efficient decisions with uncertain and uneven prices
What is the second problem of inflation?
bubbles in the economy; when there is more money in the economy it can sometimes go all to the same place creating a rise in price in a certain area, which creates a bubble and it can be difficult to identify. When these bubbles burst it causes higher unemployment
What do the “Austrians” believe?
the overall spontaneous order of the market is stable and are all connected by prices and in order for the economy to go bad something must go wrong and all errors must be made by central banks
What is monetizing debt?
When the central bank or Fed attempts to assist the state in its borrowing by purchasing the debt by printing bonds and selling them to their relatives across the street at the central bank for newly minted currency
With inflation what do borrowers and lenders do?
borrowers gain and lenders lose
What is the inflationary tax?
When the state creates inflation in order to reduce the value of its debt
