Chapter 7 Flashcards
Equation of Exchange
Shows the Relationship between prices and the money supply
MV=PQ
MV=PQ
M=
Money Supply
MV=PQ
V=
Velocity
the number of times $ turns over
MV=PQ
P=
Price Level
MV=PQ
Q=
Amount of output produced by an economy
Who discovered MV=PQ?
John Stuart Mill
Nominal Interest Rate
Formulated Rates that banks make based on predicted real interest rates
Secured Loans
loans backed by assets that are less risky
unsecured loans
not backed by anything, higher rates
Monetizing Debt
Fed purchasing debt in return for dollars
Inflationary Tax
when the fed creates inflation on order to reduce the value of it’s debt
3 assumptions of the simple quantity theory
the equation of exchange applies
Velocity is constant
Output is constant
What is the prediction of the simple quantity theory?
The Price Level and Money Supply are proportionally related
Helicopter Drop Story
In the short run, prices and output increase.
In the long run, wages increase causing output to to be restored to potential.
What assumptions does the simple quantity theory rest on?
Velocity is a stable function of a few variables
Output may change in the short run, but in the long run, it returns to the economy’s potential.
