White Unit6-Friedman&Schwarthz Flashcards
(16 cards)
Transactions Velocity of Circulation of Money
the ratio of the annual transactions of the community to its stock of money
Income velocity of circulation of money
the ratio of annual income to the stock of money
The relationship between the nominal and the real quantity of money
the real quantity of money or velocity is calculated at the set of prices prevailing at the date.
The analysis of quantity theory of money
What factors determine the quantity of money that people wishes to hold
The conclusion of the quantity theory of money
Substantial changes in price or nominal income are the result of change in nominal supply of money
MV and M’V’
MV=transfer of hand-to-hand currency
M’V’=transfer of deposit
M=volume of currency
V=velocity of currency
M’=volume of deposits
V’=velocity of deposits
In MV=Py, v stands for
the average number of times per unit time that the money stock is used in making income transaction
Keynesian Analysis of money
Concerns qualities of money as an asset
Interest Rate=Cost of holding money
Keynes’s view on long run
-Disregarded long-run equilibrium by full employment of the resources (unlike Friedman, neglected the role of wealth in consumption function)
Friedman’s view on long run
There may be frictions and rigidity in reaching long-run equilibrium, and changes in technology, resources, and institutions may change the equilibrium levels. However, there is no flaw in the price system unable the market to reach its equilibrium.
Keynes’s following on Marshallian ideas
- Just like Marshall, Keynes also adopted the supply and demand approach for equilibrium analysis.
- He also adopted Marshallian methods of discrete, rather than continuous, approach to analyze multiple equilibrium positions.
Contrast to the Marshall, Keynes
- focused on the short-run nominal market rigidities
- While Marshall argue that price adjust more rapidly than quantities, Keynes argued that the quantity adjust more rapidly than price.
Keynes’ interpretation of Great Depression
Liquidity Preference Theory
- change in M reflected in the k rather than y
- Whole adjustment takes place in k.
- k is not a numerical constant, but rather a function of other variable such as, interest rate.
- However, interest rate is slow to adjust, which explains why people prefer to hold cash.
- Price is institutional datum, and not affected by M
Under Liquidity Preference Thoery
Income can change without M or interest rate, and M can change without change in income or interest rate. People will switch whatever forms of money they prefer. (Ex: Money or bonds)
The conclusion from the fact that the change in M is offset by the change in V
With that P is not affected by change in M, V absorb all the changes in M with no effect on N or y. (without changes in interest rate.)
the demand for money as highly elastic with respect to the interest rate and investment spending, while highly inelastic with saving
M and k Keynesian VS Friedman
Keynesian: M and k goes opposite direction. Increase in M makes people want hold less amount of money and prefer other types of liquidity assets.
Friedman: M and k goes same direction. Increase M leads increase P, and therefore, people has hold more money to buy goods and services.
