Ch 7

Question 1

What is the only way consumers can spend more on all goods?

Answer 1

there must be more dollars available to spend

Question 2

What does the equation of exchange show?

Answer 2

the relationship between prices and the money supply

Question 3

MV=

Answer 3

PQ

Question 4

What does M, P and Q stand for?

Answer 4

money supply, price levels, the amount of output produced by the economy

Question 5

What is velocity?

Answer 5

The number of times a dollar is turned over

Question 6

What is PQ?

Answer 6

the amount spent on the output at the current price level (the total amount of spending in the economy)

Question 7

What does MV=PQ mean?

Answer 7

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)

Question 8

Who created MV=PQ?

Answer 8

John Stuart Mill, just about no economist disagrees with him and it was put into a formula in the 1900s by Irving Fisher

Question 9

Who created the simple quantity theory?

Answer 9

Irving Fisher and Ludwig Von Mises

Question 10

What does the simple quantity theory start off with and observe?

Answer 10

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

Question 11

What does the quantity theory assume?

Answer 11

in the short run, velocity and output are constant, just numbers that can not change

Question 12

What is the result of the simple quantity theory?

Answer 12

the price level and the money supply are proportionally related

Question 13

Where does inflation come from?

Answer 13

In our economy, inflation comes from the Fed and the banking system increasing the money supply

Question 14

Who founded the monetarist school of economics?

Answer 14

Milton Friedman

Question 15

What does monetarism begin with and assume?

Answer 15

the equation of exchange and then softens the assumptions of the simple quantity theory

Question 16

What did Friedman say about velocity?

Answer 16

He said that velocity is not fixed, but instead does not change much and is predictably stable

Question 17

What did Friedman think about output?

Answer 17

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

Question 18

What is the first problem of inflation?

Answer 18

firms can not make efficient decisions with uncertain and uneven prices

Question 19

What is the second problem of inflation?

Answer 19

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

Question 20

What do the “Austrians” believe?

Answer 20

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

Question 21

What is monetizing debt?

Answer 21

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

Question 22

With inflation what do borrowers and lenders do?

Answer 22

borrowers gain and lenders lose

Question 23

What is the inflationary tax?

Answer 23

When the state creates inflation in order to reduce the value of its debt