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Hot answers tagged quantity-theory-of-money

5

It would seem logical that this would result in reverse-inflation or lower prices, but this is actually not the case (at least over time). The banking system has a "supply and demand" market for reserves. When say 1 million dollar is withdrawn and not redeposited, the banking system in the aggregate will bid more for current reserves to replace the ones ...

3

You're getting two quite different concepts mixed up: Banks earn a spread on loans for serving as an intermediary between savers and borrowers and for holding credit risk. The process of borrowing and lending, of banking, leads people in an economy to have more liquid assets (money in a broader sense), than there is underlying cash. When economists say ...

3

Credit cards are a way of deferring payment in the form of inter-temporal substitution; it helps reduce the household's liquidity constraint that may prevent it from consumption smoothing as much as they would like if their transitory income was much more spread over the household's lifetime. You are right that the amount of money doesn't change. Loans ...

2

The money supply expansion mechanics are interesting, but do not affect loan pricing. Let’s assume that the only assets a bank invests in are loans it extended, and required reserves at the central bank. Furthermore, assume that the rate of interest on required reserves is 0%. We will assume that bank equity is extremely small (close to the truth), and the ...

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Taking logs of the equation $MV=PY$ gives: $ln(M) + ln(V) = ln(P) + ln(Y)$. Next, differentiating with respect to time yields $\frac{dln(M)}{dt} + \frac{dln(V)}{dt} = \frac{dln(P)}{dt} + \frac{dln(Y)}{dt}$. Or, using $\frac{dln(X)}{dt} = \frac{\dot{X}}{X}$, with $\dot{X} = \frac{dX}{dt}$, the derivative of a variable $X$ with respect to time, you can ...

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As I noted in a comment, the description in this question of real world central banks is overly simplistic. Central banks do not make proportional changes to the monetary base to set the price level. However, I will ignore those problems, and just address the core of the question: 1) Will it make sense to change account balances on a pro rata basis to keep ...

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M * V = P * Y is not in a form of growth rate, so it needs to be changed into ΔM + ΔV = ΔP + ΔY Because V is constant, then 14 + 0 = ΔP + 5 ΔP = 9% ΔP = Change in price = inflation

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Money demand is fixed because it depends on the real economy....that's an assumption. So when M changes only P can change. That's the theory. It's not really a theory. Just an accounting equality, since V is never defined exogenously. It's bad economics. :/

1

$M\cdot V=P\cdot Y \Leftrightarrow M=\frac{P}{V}\cdot Y\\ \frac{1}{V}=k \Leftrightarrow M=kPY$ So suppose we keep $V$ and $Y$ fixed and vary $M$, $P$ varies as well and this means $kPY$ also varies (because of P). More specifically when money supply goes up while keeping velocity and output constant, the price level has to rise,(raising money demand to equal ...

1

If one believes that there is a single equilibrium, and that markets will find it whatever the starting position, then money must be neutral in the long run. A monetary intervention, in that world, is a temporary perturbation that will get traded away to zero eventual impact, as everything returns to equilibrium. It is likely that neither of those ...

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There are multiple ways that a central bank can resort to apply its designated monetary policy. The most common one is called "open market operations (omo)", which is basically selling/buying government securities to/from private individuals or organizations. Through these operations, central bank affects the level of cash reserves in the banking system ...

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Even in simplest of models I don't think it is enough info to constrain the fx rate. Even if velocity can be worked out we can't get m0. In the simplest model all islanders are equally capable or some equilibrium arises where everyone gets the same proportions of resource. Then if resource x has $a$ units per person and total of all resources or sum of all ...

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The velocity should just be the amount of times the average unit of currency exchanges hands per year. That is $10$ if we take the highest possible number. Money supply is $100$ units of island currency ($IC$), so that the left side of $$MV=PY$$ turns into $100*10$ Nominal GDP, so $YP$, is \$$100 per Islander, or$$\$100/XR*n$$in$IC$, where$XR$... 1 The level of a price index (like the GDP deflator) is essentially arbitrary. The usual choice is to set the reference date to 100, but it could just as easily be set to 1. So the level of the real money balance is essentially an arbitrary number. If you were using it in an economic model, you would need to adjust the scaling in the functions to account for ... 1 You may have misunderstood the endogenous money-creation argument. The endogenous money growth theory is a useful explanation of how monetary expansion works: but note that it describes the aggregate effect across the whole banking system; not the effect within a single bank. When a bank takes deposits of 100, it can't lend more than that. Indeed, because ... 1 Amongst central bankers there is no controversy, the money multiplier is plain wrong, see this definitive paper from the Bank of England here. So assuming that loans create deposits... Imagine a bank lends (i.e. creates) 1000 dollars for person A to buy second hand car from person B (for simplicity imagine they both are customers of the same bank). Person ... 1 Assume there are two agents in an economy,$A$and$B$, (and some costless transaction mechanism). Per time period, agent$A$produces alone quantity of intermediate good$q_A$. Agent$B$, thorugh a company where it is shareholder, buys this quantity, the company inputs also some other intermediate good , say$q_B\$, and the two together through a production ...

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"If everyone can profit" could be taken by if everyone has access to a chance to gain something from an investment. This investment can be of one's own labor (e.g. harvesting crops, transforming goods, or being employed) or of one's wealth (giving your capitals in exchange for interest). In the limit: yes, everyone can profit, since everyone has a chance ...

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I think the best way to answer you is to build a simple model. That's usually what economists do to answer such questions. I hope it will be useful. Assume there is only one good in the economy, the 'consumption good', that people are all of the same generation or the same age and that one lives only for two periods (youth, and old age). Then the answer to ...

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