InflationDeflation-GeorgeMasonUniversity.pdfVIP

12/4/2014 Inflation Deflation Money Spending vs. Production Prices ? 2011, Jay Cochran, III PhD Equation of Exchange M ××× V = P ××× Q ? AKA: “The Quantity Theory of Money” – Revived by Irving Fisher (Yale); popularized by Milton Friedman (U Chicago) ? “Inflation is always and everywhere a monetary phenomenon.” Friedman – Rising Prices are an Effect (not the cause) of Inflation ? Interpretation: the speed at which we spend money equals the nominal value of goods received. ? Tautological? Perhaps, but it emphasizes the interaction between money and goods and the mutuality of voluntary exchange. – The Simple “Bread” economy model – Does inflation makes us better or worse off? ? 2011, Jay Cochran, III PhD 1 12/4/2014 Money, Prices, Velocity ? Since 1913, w/a few exceptions, money has grown faster than Production (Q) ? ↑Prices – Real GDP – Money – Prices ? Velocity fluctuates; ominously, has been dropping since 2008 – “Pushing on a string” – Policy impotence ? Key: ? in money and/or velocity (spending) ? ? prices ? Inflation ≡ declining purchasing power of dollar (more below) %???M + % ???V = % ???P + % ???Q If Velocity (V) is stable, real GDP (Q) grows at 3%, and the Money Supply (M) grows at 5%, what happens to prices? …Is Velocity Stable? ? 2011, Jay Cochran, III PhD Inflation Commodity Money ? Can inflation occur under a commodity money standard? – Clipping (reeding) – Debasement (hallmarks, assays, reputation) – Technological Advance (in c