Finance and the economy

the economy's supply of money

- Affects the three key economic indicators of inflation, economic growth (GDP), and interest
rates.

- According to classical economics, household -> firm in the form of money and receive goods
and services, while household -> firm in the form of land, labour, capital, and entrepreneur and
receive wages, interest, profit, and rent.

- The velocity of money is the average number of times that $1 is spent over the course of a
year; MV=PQ.

- According to classical economists, the aggregate supply curve is vertical (if the circular flow's
outer layer is fixed, the supply will be fixed), so a change in M is proportional to a change in P.
However, in this case, V is constant because it depends on how people behave, so they claim
that an increase in the money supply will result in inflation.

In conclusion, an increase in money supply leads to an increase in prices, a rightward shift in

aggregate demand, and inflation.

- Deflation will result from a fixed money supply and an increase in the quantity of money (but
not in a classical economy).

- Keynesian economists claim that the aggregate supply curve is horizontal (costs won't rise
while unemployment is high, hence output will rise but costs won't)

- If total demand rises, there will be a rightward shift, the price will remain the same, but Q will
rise.

Keynesian economics prioritises the short term.

- Relation of exchange, quantity theory of money, MV = PQ

- Keynesian and classical economists emphasise monetary policy as a supporting force and
concentrate on fiscal policy.

- Fredman/Monetarist -> let the private sector handle fiscal policy and utilise the money supply
to regulate it

- With MV = PQ, M represents the money demand and M = 1/V * Nominal GDP or M = K *
Nominal GDP.
- The ability to regulate fiscal policy through the money supply (nominal GDP)

- According to Fredman, raising Q in the economy could result in higher inflation.

- The elasticity determines how much change occurs.

What is currency? How Deposits Work as Money and How Do Banks Get Their Money?

- Money is a universally recognised means of exchange that provides purchasing power.

Demand deposits and money in circulation (by the government); M1 = CC + DD

- Only the government and banks have the ability to create money.

- D1+D2+D3+D4 ...... + Dn = D1 + D1(1-r) + D1(1-r)2 +.......... = D* (1 + (1-r) +......) = D* (1/1 -

(1-r)) = D* 1/r

- The money multiplier is 1/r.

- According to geometric evolution, the total reserve will equal D1.

- Monetary Base * Money Multiplier = M1 = CC + DD = CC + D/r (CC + D1)* 1/r

- Reserve ratio, repo rate, and open market operations are three ways to manage the amount of
money in circulation.

- A change in r can have a significant impact on the money supply; for instance, the 2010 stock
market meltdown was sparked by a shift in the CRR rate from 5% to 6%.

The Money Market Multiplier and the Fractional Reserve Banking System