Quantity theory of money is a basic topic that one should have general ideas about in order to understand the long run relationship between prices and inflation in macroeconomics class. One of the central implication of the theory basically states that countries which have higher money growth tend to have higher inflation rate. The quantity theory of money has been supported by data from many countries and for different periods of time. A common way would be used in this paper to provide proof for the theory is through computing average inflation, money growth, and real GDP growth from at least 30 countries in a cross section of 10 years or more. If the growth in money velocity is constant, percent of inflation would equal to percent growth in money supply minus percent growth in real GDP. Therefore, testing of the quantity equation would examine whether there is evidence that the quantity equation holds in practice across countries.
Before looking at the data and evidence supporting the quantity theory of money, we will focus on some opponents’ claims about this theory. Opponents of the theory has argued that the theory falls short, as it does not take into consideration the demand for money, simply the supply. The theory assume it is not put in practice under the neoclassical model with zero regulatory interference where supply would be set equal to demand, and prices tend to be sticky in the short run. According to an online article, the president of Argentina’s central bank, Mercedes Marcó del Pont, affirms that it is not true that “printing more money generates inflation” and believes “inflation is rooted in other causes.” As she added to the interview with two pro-government local newspapers Página 12 and Tiempo Argentino,...
... middle of paper ...
... short-run that the increase in money supply does not affect the price. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold. Nevertheless, there are enough data and proof for the relationship between high level of money supply and higher inflation rate in the long- run saying that money supply has a direct relationship with the price level.
Works Cited
Gerlach, Stefan.”Testing the Quantity Theory Using Long-Run Average Cross-Country Data.”
1995. PDF file.
"Printing Money Does Not Lead to Inflation, Argues Argentine Central Bank
President." MercoPress. N.p.,26 Mar. 2012. Web. 02 May 2014. .
money.In the line “To be made of it !” Gioia uses a hyperbole by referring to rich people as being
In this section I will be discussing how inflation rates have increased over the past 40 years, and what effect this has had on monetary growth. Inflation rates are defined as the rate of change in price levels in our economy especially Canada. Surveys are conducted quarterly or monthly to determine and generate a Consumer Price Index. The CPI is conducted with a “basket of goods” to determine changes in consumer prices for Canadians. It is important to study and analyze the rate of inflation because it helps the government determine how the dollar value has changed over a period of time. Also to adjust pending contracts and initiate new pensions which have to take into account the effect of inflation. Less well-off people and elderly are more
Monetary policy is said to be expansionary when it increases the total supply of money in the economy more rapidly than usual. But it can also be termed as contractionary if it expands the overall money supply in a slower rate or shrink it. The price at which money can be borrowed at is usually referred to as the economy’s interest rates. The main aims of monetary policies are: control inflation, control economic growth, unemployment and the exchange rates.
Its main focus is on monetary and other financial markets, determination of interest rates, extent to which monetary policy influences the behavior of the economic units and the implication such influence have in the context of macroeconomics. Hence, monetary policy could be defined as an economics of money supply, prices and interest rate, and their consequences in the economy. It therefore focuses on monetary and other financial markets, determination of interest rate, extent to which these policies, influences the behavior of economic units and the implications the influence has in the macroeconomic context. (Jagdish,
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can have upon an economy’s inflation rate.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
(O’Sullivan) Inflation causes each unit of currency to become weaker. In turn, this causes interest rates to rise as compared to the period before inflation. (O’Sullivan) Inflation rate is an annualized percentage change of the general price index over time, and is also the main measure of price inflation. (O’Sullivan) At the start of 2014, the inflation rate for the United States was recorded at 1.6%, but that figure has risen to 2.0% as of July 2014. (US Inflation Calc.) Over the last five years, the inflation rate of the United States has averaged right around 2%. (US Inflation Calc.) Both positive and negative fluctuations in this rate are due to increases or decreases in consumer spending, but the rate has still remained relatively stable. One factor in the stable inflation in the United States can be attributed to the lack of unnecessary growth in the supply of money by the Federal Reserve. Another factor can be attributed to fluctuations in demand for goods and services, and changes in available
In this report, I will be distinguishing Demand and Quantity Demanded by stating the differences between both terminologies. By referring to the textbook which we are using throughout our course plus resources from the internet, I have been able to collect some information about the definitions of demand and quantity demanded. The factors which affect the movement along the curve and shifting of the curve have been stated in the following pages in this report. Demand and Quantity Demanded are different in terminologies and also literally. The demand and quantity demanded curve has differences and it can be seen in the figures which I had pasted below.
Money creation is the process by which the money supply of a country is increased. There are several ways that a government, in coordination with the country's commercial banks, can increase or decrease the money supply of a country. If a country follows a fractional-reserve banking regime, as virtually all countries do, not all of the money in circulation needs to be backed by other currencies, physical assets such as gold, or government assets.
In 1956, Phillip Cagan wrote a classic article in which he developed a simple model for money demand. While the aim of Cagan’s article was to develop a theory for hyper-inflation, his model has been used far beyond this original application. Cagan-type money demand functions have become the standard base from which many monetary discussions begin. One such instance of its broader applications is seigniorage. The same year Cagan published his model, Martin Bailey, while at the University of Chicago with Cagan, expanded the Cagan money demand function to assess seigniorage, developing the well-known Bailey Curve (Bailey 1956).
Money supply is the availability of money in the hands of the public (economy) that can be used to purchase goods, services and securities. In macroeconomics, the price of money is equivalent to the rate of interest. There's an inverse relationship between money supply and interest rates. As money supply increases, interest will decrease. On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium. There are several factors affecting money supply; and these contributing factors will be the main focus of this paper. Understanding the basic principle on money supply is imperative to have a good grasp on the macroeconomic impact of money supply on business operations.
the empirical relations based on the VAR test conducted for the period 1990 to 2009 show that, Money supply and inflation are weakly positively correlated, Money supply and interest rates are very weakly and negatively correlated, Money supply and real GDP are strongly positively correlated, Money supply and nominal GDP are very strongly negatively correlated. Furthermore, the response of inflation to shocks in money supply is very weakly positive or has no effect since it is constant through out. This indicates that the relationship between money supply and inflation is not too significant.
Most of the economists agreed high inflation is caused by the excess growth of money supply .According to M.Freidman’sdictimum said inflation is a monetary phenomena he developed a monetarism model which is on three bases:the quantity theory, the expectation augmented Phillips curve and Okun’s law. In this model he taught the real effect generate due to growth of money supply .Another important aspect of relationshi...
Today, couple of monetary forms are completely upheld by gold or silver. Subsequent to most world monetary standards are fiat cash, the cash supply could increment quickly for political reasons, bringing about inflation. The