Questions tagged [quantity-theory-of-money]

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Why doesn't the Fed restrict its open-market operations to Gold?

The Fed has traditionally bought and sold Federal government bonds (and agency securities that we may conceptually include within Federal government bonds). The first question is: what would be the ...
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Which empirical correlations are known between the velocity of money circulation and economic factors?

Usually the velocity of money is calculated as a ratio of GDP (or similiar) over a monetary aggregate (typically M2). But, it is debatable whether that simple ratio is really measuring the rate at ...
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Is There an rNPV Model Relating Money Supply, Total Wealth and Money Velocity?

It seems sensible that the supply of constant-value units of fiat money should roughly correspond to the total wealth of the jurisdiction's economy, in the same sense that an on-demand gold ...
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Who first described/coined “velocity” of money?

Restatement: Who is responsible for originating the term “velocity” to describe the rate of money circulation? Also, who is responsible for first discussing this rate, specifically? Background: While ...
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To what extent can cryptocurrencies be influenced by monetary policy?

Background In modern economies, at least up until ~10 years ago, it was assumed that a currency would be technically able to be subjected to monetary policy, that is, where more money is created or ...
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Why in the quantitative equation: $MV=PY$, $V$ and $Y$ can be taken as fixed?

To equation is \begin{align} MV=PY \end{align} where $V=\frac{1}{k}$. Why $V$ and $Y$ can be taken as fixed or constant? Why can $V=\frac{1}{k}$ too? Thanks in advance
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2 answers
967 views

What exactly is "quantity of money per unit of output"?

When making the case about inflation being monetary phenomena, Milton Friedman shows a graph where "quantity of money per unit of output" move together with CPI. What is "quantity of ...
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1 answer
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I there an established correlation between Federal Reserve balance sheet and MB( monetary base)?

More precisely: Are there any implied bounds for the ratio M0/FRBS with MB= the monetary base and FRBS=Federal Reserve Balance Sheet? https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm ...
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Differential form of the quantity theory of money

The quantity theory of money is $MV = PY$. Why is the differential form $\delta M + \delta V = \delta P + \delta Y$? Shouldn't it be $V\delta M + M\delta V = Y\delta P + P\delta Y$?
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2 answers
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Does inflation equal change in M1 or M2?

According to monetarism, inflation can be predicted precisely by the change in money supply and GDP growth. Does "money supply" here refer to M1 or M2, i.e. does it include debts created by ...
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1 answer
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Are taxes,subsidies and social money transfers(i.e. welfare) accounted in money velocity?

As far as I know, money velocity is an average amount of times a typical, say, dollar, gets spent on goods during 1 year. So if it's spend N times to pay for goods, then money velocity equals N. But I ...
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Equation of exchange and inflation target

The inflation target is $2$% and the equation of exchange states $MV=PQ$. Is the idea that we want to have greater money supply growth then real growth in general?
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4 answers
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Why does an economic slowdown lead to deflation?

Usually economists say that in recession there is deflation, so increasing the money supply does not lead to a high level of inflation. According to the Quantity theory of money, the price level is ...
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1 answer
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During the COVID pandemic, why can't helicopter money be used to replace lost income for those barred from working?

In "normal times" my understanding is that one way Central banks create money is by extending a loan. The loan ensures money will be soaked back up in future, thus preventing inflation / devaluation ...
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-1 votes
1 answer
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How to calculate velocity of money when some people make long-term savings?

Bob gets paid every month and lives paycheck-to-paycheck, so for Bob's money velocity is 12 (assuming that there is nobody else in the economy). Al gets paid every two weeks and lives paycheck-to-...
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1 answer
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Velocity of M1 versus M2 money

According to Pablo Kurlat's textbook on Macroeconomics, the graph of Ch 13 compares the velocity of M1 and M2 over the years. I don't understand why M1 velocity exceeds M2 even though M2 includes more ...
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3 votes
2 answers
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Quantity theory of money: microfoundations

The quantity theory of money states the price level is proportional to the amount of money in circulation. That is, if the quantity of money increases by some factor $k$, the price level will increase ...
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1 answer
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Quantity theory of money

Suppose the velocity of circulation (V) is constant. Annual growth rate of real GDP is 5%. The money supply grows by 14% per year. Use the quantity theory of money to calculate the inflation rate. My ...
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Difference between IS curve viewed by Keynes and by Friedman

In my economics lectures, we are going through Keynes vs Friedman. As far as I got we have a downward sloping IS curve in the IS-LM model. We get this curve from the Keynesian cross when the rate of ...
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Who profits from monetary expansion?

Is my understanding correct: In history (ancient, medieval) money was directly created by governments, therefore any monetary expansion meant 100% net profit for government, which could be used to ...
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2 votes
3 answers
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I don't understand the MV = PY

I'm not a native speaker so please excuse my English. When they draw the result that the central bank's monetary supply determine the inflation rate, didn't they suppose many variables sticky? With ...
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Would taxing money owned (as a share of purchasing power) be a better form of taxation?

Consider a nation whose money is entirely digital (like Bitcoin), but centralized (unlike Bitcoin). Furthermore, the total money supply is fixed, i.e. money cannot be created nor destroyed. To be ...
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2 votes
3 answers
571 views

Why do many economists believe that money is neutral in the long run?

If a central bank carried out monetary policy that consisted of multiplying each person's wealth by a common factor, I would find it plausible that all prices would get multiplied by the same factor ...
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1 answer
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Question on money supply related to new crypto project

Following questions are related to a crypto project I am working on and proper answers are of utmost importance to this concept's development. I unfortunately lack expert knowledge about money supply ...
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1 vote
0 answers
245 views

How can I determine if a token economic is viable?

Given a system where you incentivize people to do actions in a system, we might have good and bad actors. I would like to know if there is a software or framework where I could put the different <...
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2 votes
2 answers
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What is the effect of expansionary fiscal policy in case liquidity trap situation?

I've read that liquidity trap means interest rate is at its minimum and increase in real money stock will not lead to fall in interest rate because people will be demanding whatever the amount is ...
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0 votes
2 answers
264 views

Difficult quantity theory of money question

Suppose that you live on an island with 100 units of currency. The cultural beliefs of the islanders discourage an excess focus on commerce, which has created two important rules of commerce. First, ...
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Static and Dynamic models: Testing the Quantity Theory of Money

The quantity theory of money is stated as a simple equation which states that the general price level of goods and services is directly proportional to the amount of money in circulation. This is ...
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2 votes
1 answer
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Doubt on the meaning of real money balances

Mankiw defines real money balances, $\frac{M}{P}$, to be the quantity of goods and services a given amount of money can buy. On page 88 of Macroeconomics 7th edition, he illustrates the concept with ...
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5 answers
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Why do banks charge a spread on credit?

According to the doctrine of the money multiplier (https://en.wikipedia.org/wiki/Money_multiplier), a positive reserve ratio means a bank has LESS loans than deposits. See the table in the link. ...
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3 votes
3 answers
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What is Q in the quantitative theory of money?

I am testing the quantitative theory of money for South Africa. QP = Mv. It is fairly clear what M and P are (broad money, or M1, price index, etc). But I am puzzled with Q. Is it GDP or does it ...
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3 votes
0 answers
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Why is money super neutral in Brunnermeier and Sannikov's I theory of money?

I'm wondering why money is super neutral in Brunnermeier and Sannikov's "I-theory of money", but is not super neutral in their 2016 AER paper "On the optimal inflation rate". In the I-theory of money,...
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Wealth - Bond Market and Liquidity Preference Framework

I've been told that an increase in wealth will lead to an increase in both the demand for Bonds determined by the Theory of Asset Demand. This should shift the bond curve to the right, increasing ...
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2 votes
3 answers
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Can everyone in an economy profit?

I earn a salary, but, like many American workers, I don't spend all of it -- I stash away some in the bank. This is a good thing, since I can one day retire (stop producing), and still live ...
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0 votes
1 answer
810 views

How is the growth rate form of the exchange equation derived?

Equation of exchange states: $ MV=PY $ where, $ M $ is Quantity of Money $ V $ is Velocity of Money $ P $ is Price Level $ Y $ is Real GDP Could someone please share how ...
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1 answer
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How does burning a huge amount of cash money affect the monetary supply? [duplicate]

I am not an economist by default. In other words, I am a newbie here. Assume there is an extremely rich man who withdraws an extremely huge amount of cash money. He then burns all of it. How does ...
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2 votes
0 answers
2k views

What does the introduction and expanded availability of credit cards do to money velocity?

Consider the quantity theory of money: $MV=PY$. "Consider an example of a demand shock: the introduction and expanded availability of credit cards. Because credit cards are often a more convenient way ...
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3 votes
2 answers
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Does the introduction of credit card affects Money Velocity?

In my macroeconomics class, our professor showed an example of the introduction of the credit card. She says that this will decrease the money people are willing to hold, and thus increase the money ...
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