Question

please answer the following questions about inflation theories:(better if they're typed)

a) What is Friedman’s version of the quantity theory of money?

b) What is the Q theory of money equation, and what does everything stand for?

c) What are the policy implications of the quantity theory of money?

d) What is the institutional theory of inflation?

e) What is endogenous money?

Answer 1

a) According to Friedman's reformulation of the quantity theory of money, the supply fo money is independent of the demand for money. The supply of money is unstable due to the actions of monetary authorities whereas the demand for money is stable. Thus, the demand depends on asset prices or relative returns and wealth or income.

M/P = f (y, w; R_m, R_b, R_e, g_p, u)

Where M is the total stock of money demanded; P is the price level; у is the real income; w is the fraction of wealth in non-human form: R_m is the expected nominal rate of return on money; R_b is the expected rate of return on bonds, R_e is the expected nominal rate of return on equities, g_p is the expected rate of change of prices of goods and u stands for other variables.

b) The Quantity theory of money states that teh price level is related to fluctuations in money supply, and is given as:

MV = PT

where M = money supply

V = velocity of money

P = average price level and

T = volume of transactions in the economy

c) The basic policy implication of the quantity theory of money is that central banks should not try to manipulate the money supply in response to changing economic conditions. The economy will adjust ítself in the times of recession based on the monetary policy adopted.

d) According to the institutionalist theory of inflation, money supply increases are a necessary link in the inflationary process, but not the root cause. Such theories argue that the institutional structure leads to inflation, and that increases in the money supply are necessary to make sure the demand exists to buy the goods at the higher prices.

e) Endogeneous money is the economy's supply of money that is determined endogeneously i.e. as a result fo interaction of economic variables, rather than exogeneously by some outside authority.