Question

I have two questions:

1) What are some of the possible causes of recessions that Wesley Clair Mitchell discusses, and which ones seem most plausible to you?

2) What are the similarities and differences between the simple quantity theory of money and the equation of exchange?

I'll appreciate your answers, Thanks in advance.

Answer 1

Mitchell suggests a self-generation theory of business cycle, after study of long-series historical data on business activity, he showed that each phase of a business cycle would automatically create the condition for the next phase.

Following are two causes of recession

1. it is the unequal growths of different elements (profit, cost, capital) within the usual process under capitalist institutions that lead to each recurring crisis. E.g., imbalances in investment and demand, conflict in the money market. It can also be called maladjustment to occur in different factors in the business operation

2. Decline in the profits rate cumulatively: It becomes tough to increase the selling prices to keep profits higher as the operational costs increased.

The first one seems quite imperative to me, as lots of conflicts happen in the capital market, people are now more concise of misadjustment in the stock market, instead rely on real investment return. So the dominance of the financial market is essential to the factor where uncertainty always makes investor pessimists. So It is a source of creating imbalances in the economy. It seems over-responsive and over-estimate the event occur in the world and making people more skeptical. Some times the input market adjusts faster and the capital goods market slower so create an adjustment problem.

2. simple quantity theory of money and the equation of exchange are two similar concepts. Both based on the same idea that the monetary value of expenditure equals money value on income.

According to QTM and equation of exchange, if the number of doubles, price levels also double. A direct connection between the quantity of money in an economy and the level of prices. While in the short run both assume V and T (Q) are constant in the short term

MV=PQ (QTM) Q in nominal income

MV = PT (equation of exchange)

M, money, P price level, V (velocity of circulation), and T (volume of transactions) are constant in the short term.

If the price is constant, income increases, then velocity and money demand also increase. It is V= PY/M, called as income velocity. While in the equation of exchange V = PT/M so v is called the velocity of transaction

QTM says total nominal expenditures is always equal to total nominal income

Equation of exchange total money expenditure equals to total money spent on purchases

Hope it helps you to understand.