ECON 1113 1st Edition Lecture 15 Outline of Last Lecture I. Fiscal Policy MultipliersA. The Government Spending Multiplier = mGB. The Tax Multiplier = mTAXC. Another View of Equilibrium in the Keynesian ModelOutline of Current Lecture I. The Monetary SectorA. The Nature of MoneyB. The Functions of MoneyC. The Quantity Equation of MoneyD. The Quantity Theory of MoneyCurrent LectureI. The Monetary SectorA. The Nature of Money1. Money supply: the stock of assets used to carry out transactions2. Previous monetary currencies: tobacco, butter, perwinkle shells, barrel staves, gold, silver, paper, electronic accounting entries in commercial banks3. In order to be money, the asset must be generally acceptable in exchange for goods and servicesa. Examplei. Demand Deposit or Checking Accountii. If people believe it, they accept it as moneyb. Material (economic) goods and services, such as cigarettes in POWcampsB. The Functions of Money1. Medium of exchange: it is the good that trades for all other material goodsa. Barter: trading goods for other goods, but requires a double coincidence of wants2. Store of value: it stores purchasing power over timea. 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 servicesa. Relative values guide resource allocationsC. The Quantity Equation of Money1. MSV = PQa. 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 timec. P: general, or overall, price levels (as measured by some price index)d. Q: real, or physical, output2. Equation is true by definitiona. Examplei. $100V = $6/unit x 100 units = $600ii. $100(6) = $600D. The Quantity Theory of Money1.% ∆ MS+% ∆V =% ∆ P+ % ∆Q2. 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 constant4. Case Study: The Price Revolution in Europe (1492-1518)a. The discovery of gold in the New World caused this eventb.% ∆ MS+% ∆V =% ∆ P+ % ∆Q  5% + 0% = 5% + 0%c. Inflation occurred with the influx of gold5. Case Study: Financing the American Revolution (1775-1781)a. Wars can be financed in three waysi. Higher taxesii. Borrowing (issuing government bonds)iii. Seigniorage (government revenue raised by printing money)b. In this incidence, they choose the option of printing more moneyc.% ∆ MS+% ∆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 powerii. This accelerates V so that P increases furthere. This caused the percentage changes to differ as years passedf.% ∆ MS+% ∆V =% ∆ P+ % ∆Q  ~50% + 10% = 57% + 3%g. This is a case of hyperinflation6. 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 GDPb. 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