Econ-Chapter 7

Question 1

equation of exchange

Answer 1

shows the relationship between prices and the money supply

Question 2

the only way people will spend more on ALL goods is if

Answer 2

there is more dollars to spend

Question 3

MV=PQ

Answer 3

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 4

money supply turning over

Answer 4

that any dollars put in our pockets or in our bank account came from somewhere, and they will go to somewhere , and they will go from there.

Question 5

velocity

Answer 5

the average number of times that $1 turns over

Question 6

what does M, P, and Q mean

Answer 6

P- price of the output and Q- is the amount of the output produced by the economy , and M- is the money supply

Question 7

simple quantity theory

Answer 7

• developed by Irving Fisher and Ludwig von Mises
• starts the equation of exchange and adds:
• over a short time period, resources are limited, so output is limited
• the speed at which money moves through the economy is limited

Question 8

the simple quantity theory assumes that in the short run

Answer 8

output and velocity are constant

Question 9

the result of the simple quantity theory is that the price level and the money supply are

Answer 9

proportionally related

Question 10

Milton Friedman

Answer 10

• founded the monetarist school of economics

- his book published in 1963- changed economics profession

Question 11

Monetarism

Answer 11

begins with the equation of exchange, then softens the assumptions of the simple quantity theory

Question 12

Friedman showed

Answer 12

• that velocity is stable and predictable

- output is not fixed, but that the economy has potential that it tends to move toward.

Question 13

equation of exchange

Answer 13

MV=PQ

Question 14

Friedman illustrates his ideas in “the helicopter drop of dollars”

Answer 14

in the short run their will be an increase in prices and quantity, but in the long run with higher prices, the real wage, the real price of a steak dinner, and all other real prices are the same as before. in the long run, the helicopter drop only causes inflation

Question 15

secured loans

Answer 15

loans that have a less risky asset backing as they are crucial to society. example: homes

Question 16

the pizza place example

Answer 16

you own a pizza place and all the prices in the economy double evenly, this means that you should still produce the same amount of goods as before, because inflation does not change production decisions

Question 17

unanticipated inflation on a good you already possess a lot of

Answer 17

your wealth is higher

Question 18

unanticipated inflation

Answer 18

borrowers gain and loaners loose-in fact , everyone who has a contract to pau with inflated dollars gains, while those who receive the inflated dollars loose , also those who are saving dollars loose

Question 19

nominal interest rate

Answer 19

bank quote this which is the rate that is advertised which shows up on your finical statements

Question 20

real interest rate

Answer 20

banks formulate their nominal interests rate based on what they expect inflation to be, aiming for this

Question 21

Secured Loans

Answer 21

example : houses

these are loans that are backed by a real asset

Question 22

unsecured loans

Answer 22

example: credit cards
these have nothing really backing the loan which means they are higher because it costs the company much more to administer the credit card, whose payments vary and changers continue to pile up and be paid off

Question 23

As long as all prices rise or fall by the same amount and inflation is anticipated,..

Answer 23

inflation has no effect on the economy

Question 24

problems with uneven inflation

Answer 24

• we don’t know the real worth of goods

- formation of bubbles in the economy

Question 25

Without prices to tell them the about scarcity and other’s preferences then

Answer 25

unemployment and less buisness will be done

Question 26

the idea that money creation fuels inflationary bubbles, which burst and cause unemployment was formulated by

Answer 26

the austrian economist Ludwig von Mises and Freidrich Von Hayek

Question 27

Austrian economists view the overall spontaneous order of the market based on-

Answer 27

tastes, knowledge, and scarcity, all connected by prices-as stable.

Question 28

Austrians say that the errors by central banks are the cause of

Answer 28

destabilization in the economy

Question 29

the state often spends more than it taxes, so it borrows from

Answer 29

private citizens, from companies, and from other governments by selling its bonds to them

Question 30

Monetizing the debt

Answer 30

when a centeral bank, such as the fed, attempts to assist the state in its borrowing by purchasing debt in return for dollars

Question 31

money creation causes inflation, which destabilizes the economy, but

Answer 31

inflation assists the state in financing its borrowing

Question 32

inflation

Answer 32

borrowers gain and lenders lose

Question 33

The inflationary tax

Answer 33

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

Question 34

US Economy from 1800-1979

Answer 34

• government issued greenbacks, would not exchange them for gold (the main issue of currency at the time)
• then the greenbacks were used to exchange with gold
• the fed was created

Question 35

Milton Friedman monetizing the debt

Answer 35

• his predictions came true, inflation brought unemployment
• inflation destabilized the economy
• Paul Volcker tightened money supply, and caused a recession
• this caused accounts to be worth half as much, and savers are lenders who then lose due to the inflationary tax