ECON 1113 1st Edition Lecture 15 Outline of Last Lecture I Fiscal Policy Multipliers A The Government Spending Multiplier mG B The Tax Multiplier mTAX C Another View of Equilibrium in the Keynesian Model Outline of Current Lecture I The Monetary Sector A The Nature of Money B The Functions of Money C The Quantity Equation of Money D The Quantity Theory of Money Current Lecture I The Monetary Sector A The Nature of Money 1 Money supply the stock of assets used to carry out transactions 2 Previous monetary currencies tobacco butter perwinkle shells barrel staves gold silver paper electronic accounting entries in commercial banks 3 In order to be money the asset must be generally acceptable in exchange for goods and services a Example i Demand Deposit or Checking Account ii If people believe it they accept it as money b Material economic goods and services such as cigarettes in POW camps B The Functions of Money 1 Medium of exchange it is the good that trades for all other material goods a Barter trading goods for other goods but requires a double coincidence of wants 2 Store of value it stores purchasing power over time a Real value of money nominal face value which is a fixed value general level of prices which increases with inflation These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 3 Unit of Accounts the value of material goods and services can all be expressed in monetary units which allows for calculations of relative values of material goods and services a Relative values guide resource allocations C The Quantity Equation of Money 1 MSV PQ a MS money supply currency demand deposits or checking accounts b V velocity of money circulation how many times the money supply is spent and respent over some time c P general or overall price levels as measured by some price index d Q real or physical output 2 Equation is true by definition a Example i 100V 6 unit x 100 units 600 ii 100 6 600 D The Quantity Theory of Money 1 M S V P Q 2 percentage change in money supply MS percentage change in velocity V percentage change in price level P percentage change in real output Q 3 Key Assumption velocity V is constant 4 Case Study The Price Revolution in Europe 1492 1518 a The discovery of gold in the New World caused this event b M S V P Q 5 0 5 0 c Inflation occurred with the influx of gold 5 Case Study Financing the American Revolution 1775 1781 a Wars can be financed in three ways i Higher taxes ii Borrowing issuing government bonds iii Seigniorage government revenue raised by printing money b In this incidence they choose the option of printing more money c M S V P Q 50 0 47 3 d Real value of money fixed nominal value percentage change in price level P i Incentives to spend money faster to avoid losing real purchasing power ii This accelerates V so that P increases further e This caused the percentage changes to differ as years passed S f M V P Q 50 10 57 3 g This is a case of hyperinflation 6 Case Study Inflation in the Weimar Republic German government after WWI 1919 1923 a Germany was forced to pay war reparations equivalent to 4x the German GDP b The money supply MS increased due to printing money so that t equaled 300 000 until they nation instituted a new currency to replace the old one
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