ECON 1113 1st Edition Lecture 19 Outline of Last Lecture I Money Demand MD Graphically II Interest Rate Determination III The Money Market and the Bond Market IV The Money Expansion Multiplier Outline of Current Lecture I The Quantity Theory of Deflation 1865 1896 A The Gold Standard B Economic Effects of Deflation C The Free Silver Movement D The Wizard of OZ as a Monetary Allegory Current Lecture I The Quantity Theory of Deflation 1865 1896 A M S V P Q 13 0 10 3 1 deflation decrease in the general price level B The Gold Standard 1 Reserves for the monetary system commercial banks and the US Treasury were held in gold 2 Overall money supply was some multiple of the gold reserves and gold reserves grew at 2 C Economic Effects of Deflation 1 Deflations increase the real value of any asset with fixed nominal value a Real value purchasing power nominal face value current dollar general price level P b When P decreases real value increases c Example Civil War Veterans Pensions i Fixed nominal value and decreasing price level ii Pensioners preferred deflation because of benefits 2 Unanticipated deflations redistribute real value purchasing from debtors borrowers to creditors lenders because creditors are being repaid with dollars of greater purchasing power 3 Groups benefitted by deflation a Civil War Pensioners b Creditors or lenders 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 c Big businesses that could control the nominal prices they charged i Real profits nominal prices price level P ii Nominal prices remained constant and price level decreased 4 Groups damaged by deflation a Industrial workers who nominal wages fell faster than the overall price level i Real wage nominal wage general price level P ii Nominal wages were decreasing by 4 but price level was decreasing by only 2 b Borrowers or debtors c Farmers d Small businesses with nominal prices falling faster than general prices D The Free Silver Movement 1 Money supply was based on slowly growing 2 gold reserves thereby hurting farmers borrowers industrial workers and small businesses who wanted inflation 2 How to increase the change in money supply a Instead of using gold reserves alone use gold and silver as reserves known as the Free Silver Movement i Hard Money defenders of the gold standard deflationists Union pensioners creditors big businesses Republicans north and east US ii Easy Money Free Silverites inflationists iii Election of 1896 Hard Money Republicans William McKinley winner Easy Money Democrats and Populists farmers and industrial workers William Jennings Bryan 1 Cross of Gold nomination acceptance speech 2 Crucifying mankind on the cross of gold Following McKinley s victory and the preservation of the gold standard inflation occurred and prices rose due to new discoveries of gold reserves in South Africa and Alaskan Yukon Territory E The Wizard of OZ as a Monetary Allegory 1 The Wonderful Wizard of Oz by populist Frank Baum from North Dakota farming state 2 Symbols a Dorothy farm girl from Kansas origin of Populism along with Nebraska b Whirlwind from the West the Populist movement going East c Wicked Witch of the East Grover Cleveland democrat defender of the gold standard d Toto teetotalers totos seeking to prohibit alcoholic beverages e Yellow Brick Road gold standard f Scarecrow farmers g Tinman industrial workers h Cowardly Lion William Jennings Bryan i Wizard of Oz in the Emerald City ounce oz city of Washington DC in which everything is green prism of money as McKinley cannot return the nation to traditional values j Ruby Slippers none except the original novel had silver slippers signifying the Free Silver Movement
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