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This is because classical economic theory absolutely does not say that: inflation occurs when the money supply is increased faster than the economic growth. Even in most basic 101 models inflation depends on variety of factors. Inflation is determined by changes in price level which in turn depends on what the money market equilibrium is. This is given by ...


5

Generally, people do not pay for bonds with currency (e.g. pound notes). They pay with bank deposits. This means that Y has lost a deposit. If the deposit was with X, the deposit is just destroyed; X does not hold deposits against itself. If the deposit was with another bank Z, bank Z loses the deposit, and it has to transfer the 100 pounds to X via the ...


5

Is it true that the Federal Reserve is not Federal and has no reserves? Both claims are blatantly false. On Reserves Fed literally has power to create new reserves for other banks or for its own spending from nothing. Not only, Fed obviously has reserves which you can easily confirm just by looking at a data (see Fed data on amount of reserves held), but it ...


4

They actually explain that in greater detail in the middle of the paper. According to McLeay, Radia and Thomas (2014): Money can also be destroyed through the issuance of long-term debt and equity instruments by banks. In addition to deposits, banks hold other liabilities on their balance sheets. Banks manage their liabilities to ensure that they have at ...


4

Why was Friedman so wrong about inflation? He actually was not wrong in a broad sense, only in more specific sense. First, you are actually misrepresenting and slightly 'strawmaning' Friedman's ideas. Friedman never claimed that inflation depends solely on monetary policy. Literally in the same video just few seconds later Friedman shows this graph: And ...


3

This question is full of misconceptions, I think those have to be corrected first. Correcting Misconceptions: Unlike a normal company, the government can't simply go to the bank and ask to borrow existing money from the bank, rather (it is my understanding) that the government goes to the treasury and asks for more money to be printed so that the ...


3

Well first of all we have to make it clear that we are talking about government debt held by central banks. Non-trivial amount of government debt will be borrowing from households firms and other governments where it is not valid to argue that the debt is an illusion. When it comes to debt held by central banks not much would change although it would make ...


3

Banks create real money simply by approving a loan. The intermediary "theory" is a misconception, at least regarding money creation as it works today as you point out yourself. Banks don’t lend out customers deposits. On the contrary: By approving a loan, a bank, say Bank A, creates a deposit of the same amount in the customer’s account. For all ...


3

When was the last time printing money involved actual printing? In the US probably today. With certainty last month. While it is true that most of the money supply is created electronically people still use physical currency and those notes have to be still printed. In addition old notes have to be continuously replaced as they wear down, or as people ...


3

Inflation by definition is a positive change in price level. You do not need to introduce money stock $M$ into a model for it to have inflation. Note prices exist independently of money. Prices are fundamentally, as Bertrand pointed out, just exchange rates of one goods or service into another. For example, a simple Philips curve is a model of inflation ...


2

If, as part quantitative easing, a central bank buys government bonds, it might affect prices of other assets positively via arbitrage and the so-called portfolio rebalancing effect. There are obviously several factors at play, but I focus on that one. If there is more demand for government bonds via QE, bond prices increase, and their yields fall. Assume ...


2

One answer that hasn't been mentioned yet is menu costs. Abolishing coins would require everything to be repriced to the nearest dollar, which would be fairly inconvenient for a large number of buyers and sellers. For example, vendors could no longer (practically) sell 5 cent candies, they would have to sell them and advertise them as packs of 20. Menus ...


2

Does this mean that Governments can continue to print a limited amount of fiat currency (say 5% of GDP) annually forever? Yes government can 'print' (I use quotation marks because most money is created electronically nowadays) any amount of fiat currency it wants to. In other words, is there a problem even if this debt that the Government owes itself, ...


2

The key to answering your question is to consider whether or not the bank that has just extended a new loan must make an interbank payment of reserves. So let bank A extend a loan 100 to customer 1. The bank debits loan assets for an increase 100 and credits deposit liabilities due to customer 1 for an increase 100. The bank balance sheet expands. Assume ...


2

The question in the title is actually a bit broader than the question in the body, I will try to answer both questions starting with the one in the title. Answer to Question in the Title Can banks 'create' money on their own or do they need help from other banks? Yes, banks actually can crate deposits on their own without help of other banks, thanks to ...


2

If these T-bills mature and are repaid then you are correct money supply will decrease. In fact that might be desirable. Just because central bank wants to increase money supply in one year that does not mean they will not want to decrease it at some further period. When the T-bill matures central bank also have option to then buy new T-bill to replace the ...


2

My question is that isn't the central bank only responsible for determining the interest rates? No, central banks do not even have directly responsibility to adjust interest rate. Depending on which country we talk about they will have responsibility to keep prices stable, high employment and bank regulation and often combination of the above. In order to ...


2

Full capacity means utilization of all resources in economy. That is all labor, capital and other resources are already used at their best uses. Economy will not always work at its full potential for various reasons. For example, due to fall in aggregate demand during recession, which can cause unemployment to be above natural rate. Monetary policy or ...


2

This paper is a few years old. You might want to look at page 6. Briefly, it varies by country and across time. https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/February2015TBACCharge1.pdf


2

Inflation Expectations Inflation expectations affect inflation because people are not myopic and take future into consideration. For example, if you expect that tomorrow prices will double, and you are having job interview today, you will be negotiating for your salary based on your expectations of future. If everyone expects inflation to be 3% people will ...


2

Well first if actually the cryptocurrency we are talking about would be created by central bank, then the rules that were used to create it would be by definition monetary policy even if supply of money would be fixed, since monetary policy is central bank’s control of money supply either directly or via interest rate (see Yeyati, Sturzenegger (2010), or ...


2

There are multiple answers to this question. In any model you can always make a thought experiment where you hold certain variables fixed. So one answer, although not very satisfying one, is that you can view it as a thought experiment. For example, in physics distance traveled equals velocity times time or $D=tv$ and you can always make a thought ...


2

The question, as I understand it, is about the reconcilliation of classical theory of inflation with empirical reality. Put in those terms, it's very interesting the concluding question: "Does the money accumulate somewhere, if so where?" The very possibility for money to accumulate somewhere is a serious problem for economics. In fact, it's ...


2

That is not a differential form of the equation. $\Delta$ there stands just for changes not differential. You can derive the equation in such form by log-linearization. Take the original equation: $$MV=YP$$ Apply natural log to both sides: $$ \ln M + \ln V = \ln Y + \ln P$$ And now you are done, since in an equation that is in log-log form you can interpret ...


2

How the Federal Reserve Manages Money Supply? Federal reserve manages money supply in various different ways (see Blanchard et al Macroeconomics ch4). The main ones are: By managing interest rates on a reserves: lower interest rate reserves allow banks to lend more and expand money supply and vice versa. By open market operations: where purchase Fed ...


2

where does it actually come from? The money comes from the reserves (note not in 1:1 ratio necessarily - the ratio of reserves to money is typically very small actually) provided by central bank (or possibly from other private bank that happens to have excess reserves/capital), and the reserves themselves are created out of nothing by government decree by ...


2

No, the data seems to be off by about a year. The Trading Economics website states that the source of their data is the Federal Reserve. Fed makes its data avaiable via FRED dataset. FRED data show large increase in M1, but not in 2021 but in 2020 as you can see below. The numbers are also bit off between trading economics and FRED data. However, the FRED ...


2

M1 changes changes all the time, depending on activity and reporting intervals. In the US, M1 consists of currency and notes in circulation, plus demand deposits/checking accounts (and other demand-deposit like arrangements). Whenever, a less liquid asset is sold/bought and the money for this transaction is put into/taken out of a checking account M1 ...


2

Friedman, "inflation is always and everywhere a monetary phenomenon", in the sense that price increases are produced by significant increases in the amount of money. Although this wording refers to the neutrality of money in terms of shaping real economic figures, it is worth noting that this neutrality does not apply in the short term when ...


2

tldr Expansionary monetary policy would be still required in recessions. Also, the solution proposed by you is not viable. Full Answer I will start with discussion of viability of your mercantilist 'solution' and then proceed to explaining why monetary policy would be still necessary. On the viability of trade surpluses First, the solution itself is not ...


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