ECON 1113 1st Edition Lecture 19 Outline of Last Lecture I. Money Demand (MD) GraphicallyII. Interest Rate DeterminationIII. The Money Market and the Bond MarketIV. The Money Expansion MultiplierOutline of Current Lecture I. The Quantity Theory of Deflation: 1865-1896A. The Gold StandardB. Economic Effects of DeflationC. The Free Silver MovementD. The Wizard of OZ as a Monetary AllegoryCurrent LectureI. The Quantity Theory of Deflation: 1865-1896A.% ∆ MS+% ∆V =% ∆ P+ % ∆Q = 13% + 0% = 10% + 3%1. deflation: decrease in the general price levelB. The Gold Standard1. Reserves for the monetary system (commercial banks) and the US Treasury were held in gold2. Overall money supply was some multiple of the gold reserves, and gold reserves grew at 2%C. Economic Effects of Deflation1. Deflations increase the real value of any asset with fixed nominal valuea. Real value (purchasing power) = nominal (face) value current dollar/general price level (P)b. When P decreases, real value increasesc. Example: Civil War Veterans’ Pensionsi. Fixed nominal value and decreasing price levelii. Pensioners preferred deflation because of benefits2. Unanticipated deflations redistribute real value (purchasing) from debtors(borrowers) to creditors (lenders) because creditors are being repaid with dollars of greater purchasing power3. Groups benefitted by deflationa. Civil War Pensionersb. Creditors or lendersThese 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 chargedi. Real profits = nominal prices/price level (P)ii. Nominal prices remained constant and price level decreased4. Groups damaged by deflationa. Industrial workers who nominal wages fell faster than the overall price leveli. 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 debtorsc. Farmersd. Small businesses with nominal prices falling faster than general pricesD. The Free Silver Movement1. Money supply was based on slowly growing (2%) gold reserves, thereby hurting farmers, borrowers, industrial workers, and small businesses who wanted inflation2. How to increase the change in money supplya. Instead of using gold reserves alone, use gold and silver as reserves, known as the Free Silver Movementi. Hard Money: defenders of the gold standard (deflationists)- Union pensioners, creditors, big businesses Republicans, north and east USii. 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 Bryan1. “Cross of Gold” nomination acceptance speech2. Crucifying mankind on the cross of gold- Following McKinley’s victory and the preservationof the gold standard, inflation occurred and pricesrose due to new discoveries of gold reserves in South Africa and Alaskan Yukon TerritoryE. The Wizard of OZ as a Monetary Allegory1. The Wonderful Wizard of Oz by populist Frank Baum from North Dakota (farming state)2. Symbolsa. Dorothy: farm girl from Kansas (origin of Populism along with Nebraska)b. Whirlwind from the West: the Populist movement going Eastc. Wicked Witch of the East: Grover Cleveland (democrat defender ofthe gold standard)d. Toto: teetotalers (totos) seeking to prohibit alcoholic beveragese. Yellow Brick Road: gold standardf. Scarecrow: farmersg. Tinman: industrial workersh. Cowardly Lion: William Jennings Bryani. 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 valuesj. Ruby Slippers: none except the original novel had silver slippers, signifying the Free Silver