2250 midterm

Why is MV=PY true by definition?

Because if we rearrange it to be V = (PY)/M, you get how we define money.

Why is Domestic Private Balance + Domestic Government Balance + Foreign Sector Balance = 0? What implications does the sector balance approach have regarding government finances, assuming different trade regimes (trade surplus, trade deficit, and balanced trade)?

Because if you take the identity: Total spending = total income DGS + DPS + FSS = DGI + DPI + FSI (DGI - DGS) + (DPI - DPS) + (FSI - FSS) = it must net to 0

How does endogenous money critique the Quantity Theory of Money?

Because money is a credit-debit relationship and is created to meet the money demand and the causality lies where there is not the full employment level of output.

How does the monetarist theory of banking relate to the orthodox theory of money?

Because the monetarist theory of banking views the nature of money as a medium of exchange and neutral in production and that consists with the views of the orthodox theory of money.

How does the Post Keynesian theory of banking relate to the heterodox theory of money?

Because the post Keynesian theory of banking views the nature of money as a credit-debit relationship that is not neutral during production and it is consistent with the views of the heterodox theory of money.

What are the Deficit Dove's arguments? How does the Deficit Dove critique Deficit Hawk?

Deficit Dove's believe that deficits can be okay under certain circumstances depending on economic context. They argue that the current measurements of deficits might be very different if they look at them in current or constant dollars. And that the debt is not all debt because it could also be assets such as land, buildings, hospitals etc. so the way we look at debt is warped and should be adjusted greatly. They do not agree with Hawks in the sense that debt is a burden the future generations.

What is exogenous money? What is endogenous money?

Exogenous money emphasizes money as a medium of exchange and the supply is determined by the central bank. Endogenous money is emphasizes money as a credit-debit relationship and is created to meet the money demand within the banking system through a money multiplier mechanism.

What are the Functional Finance's arguments? How does functional finance critique both the Hawk and the Dove?

Functional finance says that they are both wrong. They say that in a modern money society, the purpose of taxation is to create demand for and give value to an unbacked currency so the government does not need the publics money, it needs the public to give its money value. It says that Hawk is wrong because they treat the modern money system as if it were the gold standard which is not true anymore. It says the doves are wrong because by saying that the deficit is not really as big as it seems, they give into the Hawk view that it matters whether we deficit spend or not and how big it is and whether we balance it or not, which is wrong.

What is the nature, origin, and role of money, according to orthodoxy?

The nature of money according to the orthodox theory is a medium of exchange that facilitates barter. The origin of money was from a growingly complex barter system. The role of money is to act as a 'lubricant' to minimize transactions costs.

How do views of government finances relate to different theories of money?

The Functional Finance view follows with the state theory of money because money is an IOU to the government to back its currency and indent its citizens.

What is the Post Keynesian theory of banking? How is money created?

The Post Keynesian theory of banking says that money is endogenously created and is not neutral in production as production has to be financed and will not occur unless profit is expected. Money is created from a credit-debit relationship within the economy that creates an 'interbank lending market'. Money supply responds to the demand for bank credit.

What is the Quantity Theory of Money?

The Quantity Theory of Money says that money supply and price level are in direct proportion to one another. MV = PY is a neoclassical application of the theory. It believes that (PICTURE)

What is the metallist theory of money? What's its implications?

The metallist theory of money stems from the orthodox theory. It states that gold is money because it is valuable, not because it is scarce. Money is a neutral medium of exchange for commodities. Its implications are that if money is important in a society, it is the only form that matters.

What is the monetarist theory of banking? How is money created?

The monetarist theory of banking states that money supply is exogenously determined by the central bank and that money is neutral in production. They put an emphasis on the role of the government controlling the money supply. The central bank controls the money supply and excess money supply growth causes too much inflation.

What are the two ways that economists conceptualize the nature of a modern economy? How do they relate to the orthodox and heterodox theories of money?

The nature of a modern economy stems from the barter economy and the monetary production economy. The orthodox theory of money stems from the barter economy because it emphasizes that money as a medium of exchange and not the purpose of production. The heterodox theory of money stems from the monetary production economy because money is essential and holds value in a society.

What is the nature, origin, and role of money, according to heterodoxy?

The nature of money according to the heterodox theory of money is a credit-debit relationship. The origin of money was from an ancient penal system. The role of money is to serve as a unit of account and store of value. The physical manifestation is not important. Fiat money is backed by the power of the political authority to indent its population.

What are the Deficit Hawk's arguments?

They believe that the budget deficits and the national debt are almost always bad for the economy. They believe that deficits cause inflation, cause high interest rates, 'crowd out' private spending and that the national debt is a burden on future generations.

What is the credit theory of money? What is the state theory of money? What are their implications?

They both stem from the heterodox theory. The credit theory of money states that money is a credit or an IOU. The nature of money is an IOU. The state theory of money, or chartalism says that money is token and it has no intrinsic value. The use of currency and value of money are based on the power of the issuing authority, the government. Both theories see no qualitative differences between paper money and coins.

What was Volker's monetarist experiment about? How did it go? What was the "new monetary consensus" about?

Volker was a follower of Freedman and during the 1970's he hosted an experiment in which he lowered money supply and increased interest rates to almost 25% to try and decrease the amount of reserves. It contributed to the stagflation and inflation of the time. His experiment failed. The new monetary consensus says that the FED cannot control the money supply only interest rates.