Flashcards in Chapter 7 Deck (48):
Equation of Exchange
Shows the relationship between prices and the money supply
Only way consumers can spend more on all goods is if?
There are more dollars available to spend-- the money supply must increase.
M is money supply
P is the price level
Q is the amount of output produced by the economy
PQ is amount spent on?
The output at current price level- total amount of spending in the economy
V answers question of?
How can 2.5T purchase the 15T worth of output that was produced during the year?
Any dollars in our pockets or in our bank account came from somewhere, and they will go to somewhere, and they will go on form there.
Average number of ties that $1 turns over
MV=PQ just means...
That the output in the economy is brought by the money supply, which is spent and re-spent at a rate of V. This is the INTERPRETATION OF THE EQUATION OF EXCHANGE.
Over a short time period, resources are limited, so..
Output is limited
Who can up with Simple Quantity Theory?
Formulated by John Stuart Mill, developed by Irving Fisher and Ludwig von Mises
The speed at which money moves though the economy is...
Simple quantity theory assumes that in the short run,
Output and velocity are constant.
Money supply doubles...
Price level doubles
Result of the simple quantity theory is that the....
Price level and the money supply are proportionally related
Monetarism beings with...
Equation of exchange
Velocity is stable function of a few variables, so velocity is...
Predictable and stable
Monterism assumes that output is...
Monterism assumes that the labor market is in...
Equilibrium in the long run, with the amount of labor supplied equal to the amount of labor demanded.
If labor market is in equilibrium?
Our output is at its potential.
Increase in money supply makes prices?
Increase in demand for labor and for other resources pushes resource prices up causing?
The cost of proceeding output rises
In the long run with higher prices?
Real wage, real price, and all other real prices are the same as before. In the long run, helo drop causes inflation.
If inflation is spread over all goods....
It's affect is basically zero.
Cost of producing is ____ due to inventories.
Your wealth is higher due to
If you take out a loan before inflation...
You gain from inflation, lender loses.
Unanticipated inflation, borrowers gain and lenders lose....
In fact, everyone who has a contract to pay with inflated dollars gains, while those who receive the inflated dollars lose. Also, those who are saving dollars lose.
Nominal interest rate
Rate that is advertised, which shows up on your financial statements
Real Interest Rate
Banks formulate their nominal interest rate, based on what they expect inflation to be.
For loans with minimal risk, the real interest rate, the nominal rate minus the expected inflation rate is about?
Higher the risk of non-payment...?
The higher the real interest rate
Loans with a real asset, like a house.
Nothing to back up the loan
Unsecured loans are
higher because it costs the company much more to administer the credit card, whose payment vary and charges continue to pile up and be paid off.
With uneven inflation, we do not know the?
Real worth of goods
In order for firms and consumers to produce and consume efficiently in a healthy spontaneous order...
They need prices to tell them about scarcity and about others' preferences.
Formation of Bubbles
When money is created by the Fed, the dollars go somewhere. This raises the prices in some parts of the economy, but not all parts.
Austrian economists view the overall spontaneous order of the market- based on tastes, knowledge, and scarcity, all coaxed by prices, as....
What do all prices have in common?
The money supply.
Austrians say that errors by what make the root of all destabilization in the economy.
Monetizing the debit
If a central bank such as the Fed, attempts to assist the state in its borrowing by purchasing debt in return for dollars
Inflation assists the sate in?
Financing its borrowing
When the state creates inflation in order to reduce the value of its debit
During the gold standard, what was the average inflation rate?
Near zero, varying between -3.84% and 2.46%.
During the Fed's reign, dollar prices have averaged?
4%, varying between -1.7% and 9.7%
Normal inflation is how much?