Download MV = P x Y

Chapter 5. Inflation: Its Causes and Effects
Split off from Chapter 4 in the previous editions.
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Homework pp. 128-29, #2, 3
Link to syllabus
Equation of Exchange:
MV = P x Y
Y is output, or real income, rather than transactions (p. 103, 104).
Note, V is defined as P x Y/M, so the equation is an identity – it has
to be true. What is open to discussion is whether or not V and Y are
constant.
« Inflation is always and everywhere a monetary phenomenon. » (m.f.)
From calculus, %ΔM + %ΔV = %ΔP + %ΔY (p. 106).
where %Δ is ‘the percentage change;’ e.g. %ΔM is ΔM/M
This is the basis of Friedman’s proposed monetary growth rule.
Comparisons of
Velocities of M
Different
Text.
Milton Friedman, 1912-2006
Leader of anti-government movement,
which we see in rejection of discretionary
policies, and preference for rules.
Monetarism
Monetary Growth rule
Consumption function
(Introduced expectations into macro)
Flexible exchange rates
Paraphrase of Robert Solow – also a Brooklyn-born Nobel Prize Winner,
and a prominent Keynesian:
“Milton is obsessed by the quantity of money, and always puts it into his
papers. I’m obsessed by sex, but I don’t put it into all my papers.”
Figure 5.1 p. 107 Historical Data on US Inflation
and Monetary Growth
Viewed as being supportive of the Quantity Theory
Fig. 5-2 p. 108. International Data on Inflation
and Money Growth
Also viewed as supportive of the Quantity Theory.
Monetary
Growth Rule i
Monetary Growth Rule ii
Fig. 5-3 p. 111. Inflation and Nominal Interest Rates
Irving Fisher. 1867-1947
Irving Fisher was one of the earliest American neoc
classical economists, of unusual mathematical
sophistication.
( 1) his contributions to the Walrasian theory of equilibrium
price (he also invented the indifference curve device)
in 1892; 2) His volumes on the theory of capital and
I
investment (1896, 1898, 1906, 1907, 1930) which
brought the Austrian intertemporal theories into the Englishspeaking world, wherein he introduced the famous distinction between "stocks" and
flows", the Fisher Separation Theorem and the loanable funds theory of interest rates.
3) his famous resurrection of the quantity theory of money (1911, 1932, 1935); (4) the
theory of index numbers (1922).
This Yale economist was an eccentric and colorful figure. When Irving Fisher wrote
his 1892 dissertation, he constructed a remarkable machine equipped with pumps,
wheels, levers and pipes in order to illustrate his price theory. Socially, he was an avid
advocate of eugenics and health food diets. He made a fortune with his visible index
card system - known today as the rolodex - and advocated the establishment of an
100% reserve requirement banking system His fortune was lost and his reputation was
severely marred by the 1929 Wall Street Crash, when just days before the crash, he
Irving Fisher,
a bit earlier
Fig. 5-4 p. 112. Inflation and Nominal
Interest Rates, different countries
Evidence that as inflation increases, so do nominal interest rates.
Fig. 5-5 p. 115. Linkages among Money,
Prices, and Interest Rates
EYE ON THE PAST
P. 315
(Bade/Parkin
Text)
Hyperinflation in Germany in the 1920s
Fig. 5-6 p.124.
Money and
Prices in
Interwar
Germany.
End of chapter problems.
Chapter 4 #1.
1. Which functions of money do the following satisfy?
a) credit card
b) Rembrandt painting c) subway token
Chapter 5 #1
2. In the country of Wicknam, velocity of money is constant. If
Real GDP grows by 5 percent per year, the money stock by 14%
per year, and the nominal interest rate is 11%, what is the real
interest rate?