Chapter 3: Money - Flashcards

Flashcards based on the lecture notes about money, monetary theories, inflation, and deflation.

What is the problem that central banks face regarding the money supply?

To determine the amount of money a nation or economic community needs and evaluate the effect of variations in the money supply on economic activity and price levels.

What is the equation of transactions developed by Irving Fisher?

M * V = P * T, where M is the money supply, V is the velocity of money, P is the average price of transactions, and T is the total number of transactions.

According to the equation of transactions, what does M * V express?

The sum of money exchanged.

According to the equation of transactions, what does P * T express?

The total value of all transactions carried out during a period.

What do (neo)classical economists assume about V and T in the short term?

V and T are stable in the short term; the velocity of money depends on the consumption habits of economic agents, and the level of transactions is exogenous.

How can Fisher's identity be rewritten under the (neo)classical assumptions?

P = M * k, where k is a constant.

What is the relationship between the variation in the money supply and the variation in the price level according to the quantity theory of money?

∆P/P = %∆M, meaning that for the price increase to be zero, the growth of the money supply must also be zero.

What is the effect of money on the real sphere according to the classical economists?

The money has no effect on the real sphere; it only affects the price level.

What dichotomoy exists according to the classical economists?

That the real and monetary spheres are separate.

Accordint to the neoclassicals, what has to happen at long term so that the inflation stays under control?

That at long term the mass of money must grow at the same rhythm than the Agent's economic needs to finance the transactions so that the inflation stays under control.

What is Keynes' view on the role of money and the separation of real and monetary spheres?

Rejecting the idea of neutral money and separate real and monetary spheres, and considering that not all supply of goods and services necessarily meets its own demand.

According to Keynes when is it necessary to increase overall demand?

That it is necessary to increase overall demand to limit underemployment situations.

According to Keynes, what is the effect of turning on the ticket printer?

Increased monetary offer

According to Keynes, what determines the money offer and what is it independent of?

The money supply is determined directly or indirectly by the central bank and is independent of the interest rate.

What are the three motives that can encourage economic agents to hold money in liquid form according to Keynes?

Transaction, precaution, and speculation.

What is transaction money holding?

It enables the financing of current expenditure and varies proportionally with income but diminishes with the interest rate.

What is precaution money holding?

It cushions against unexpected expenses and is directly related to revenue and the inverse function of the interest rate.

What defines speculation money holding?

Holding money to buy securities based on anticipated capital gains, depending on interest rate trends.

What determines the impact on the specualtion money holding?

Si les agents économiques anticipent une hausse de i, donc une baisse du cours des obligations, ils ne placent pas leur épargne sous forme de titres, parce qu’ils vont pouvoir acheter les mêmes titres moins chers dans le futur. Ils préfèrent détenir de la monnaie plutôt que des titres. L’encaisse de spéculation est élevée.

what is the equation for the speculative purposes money demand.

Ls = f (i) (inverse function of i)

What is a «liquidity trap»?

A situation where interest rates are very low and demand for money for investment and consumption remains weak, causing money to remain inactive.

According to Keynes, what happens when the economy is in a liquidity trap?

That any increase of the mass of money will be inevitably thesourisée

What is considered as the price of money?

The rate of interest

How does an increase in the money supply stimulate the economy according to Keynes?

By encouraging investment and consumption.

According to Keynes, is money neutral in the real Economy?

It is not neutral since it produces real effect at a situation of sub-employment

What is inflation?

A generalized and continuous rise in the general price level.

When does Hyperinflation start?

When prices increase at a rate greater than 50% per month.

Who measures inflation in Luxembourg?

The STATEC.

How is inflation measured in Luxembourg?

Through the Consumer Price Index (CPI), which is a synthetic index with weighting.

What is the Indice synthétique avec pondération?

Used to aggregate several variables or indicators into a single representative number, where each variable is weighted based on its relative importance.

What is the equation for the indice of global values (indice des valeurs globales)?

IVg = (∑ Pt * Qt) / (∑ P0 * Q0)

What is the name of the Price index used by STATEC?

Laspeyres Price Index

According to STATEC, what does the index of Laspeyres fix the quantities to?

Quantities are set as standards to the period of reference.

What is the equation for the Laspeyres Price Index?

LP = (∑ Pt * Q0) / (∑ P0 * Q0)

What is de equation for the Variation Rate of the CPI?

(IPC t+1 - IPC t) / IPC t

What are the 2 main indexes called that differ slightly from each other?

– Harmonized consumer price index (HICP) is the official measure of inflation in the European Union. – The national consumer price index (CPI) is the measure of national inflation.

What is the difference between a nominal and a real salary?

The nominal salary is the one expressed in monetary units; it is the amount that the employee receives for the work provided. The real salary indicates the purchasing power of the employee

What is the equation that indicates the real Salary?

(Wn/IPC) * 100

What are nominal values in current Euros?

Expressed in current euros, this is the evolution measured in value (or at current prices, i.e. at the prices of the current year)

What are real values in constant Euros?

expressed in constant euros, the evolution measured in volume (or at constant prices, i.e. at the prices of a reference year)

What is the equation to get to the real GDP?

PIB réel n = PIB nominal n x IPC1/IPCn

What leads to inflation by demand?

Excess of demand relative to supply, leading to rising prices.

The increase of demand that pulls towards the inflation can have various origins, what's this named

Demand pull

What does inflation by costs arise from?

The rise in production cost of enterprises

What were the different origins of inflation in 2022?

Massive disruptions in supply chains, high savings levels during the pandemic, the conflict in Ukraine, and expansionary monetary and fiscal policies.

What is the inflation spiral / inflation spirale?

Rise in prices leads to hike in Salary that leads to hike in Prices. The inflation leads to inflation.

What mechanism does Luxembourg use to protect against the effects of inflation?

Indexation of salaries.

What methods does the ECB use to control inflation?

Raising the key interest rate or increasing the reserve requirement for commercial banks.

what is deflation?

A downward movement in the general price level.

What triggers deflational action?

Delayed consumer action because the agents estimate that future buying is cheaper.

What is the deflationary spiral?

A downward movement in the general price level creates expectations of further price decreases, leading to decreased spending, production cuts, and increased debt burdens.