Economics Questions

Re: Question about the demand for money with respect to the quantity theory.

nirgrahamUK — Sat, 04 Jul 2009 01:35:09 GMT

it depends what you mean by 'function'... which has definite meaning in maths...

im not sure if we are splitting hairs or talking loosely

Re: Question about the demand for money with respect to the quantity theory.

Esuric — Sat, 04 Jul 2009 01:32:31 GMT

Yeah, I understand that it's not as simple as I was making it out to be; I just assumed there was a traditional way to demonstrate an increase in the demand for money through the quantity theory. But I get what you're saying, there may be, but it's not uniform, it's not a universal rule. Thanks a lot.

Also, I understand that Austrians have, and often use a money demand function; how similiar is it to the Keynes' liquidity function?

Re: Question about the demand for money with respect to the quantity theory.

nirgrahamUK — Sat, 04 Jul 2009 01:21:51 GMT

in MV=PQ

is the total amount of money in circulation on average in an economy during the period, say a year.

is the transactions' velocity of money, that is the average frequency across all transactions with which a unit of money is spent. This reflects availability of financial institutions, economic variables, and choices made as to how fast people turn over their money.

and are the price and quantity of the i-th transaction.

as production increase this only directly affects your Q variable, ie.e quantities of goods turning over. so it could be V that changes to accomoadate (you 1/k) or could be your P or your M or some combination of the three. so your prof is oversimplifying the theory he gave you if he supposes that there is a 4 varaible relationship and in the next breath says changing one specific variable will change exactly one other of the remaining 3...

Re: Question about the demand for money with respect to the quantity theory.

Esuric — Sat, 04 Jul 2009 01:01:52 GMT

NirgrahamUK, Mises doesn't say that, that's merely what I learned in my intermediate Macroeconomics class. According to my professor, as production increases, the demand for money will have a corresponding increase, as consumers have more "stuff" available to them, all other things being equal. As Q/Y/T increases (ceteris paribus) price must correspondingly decrease (MV=PQ). Furthermore, I was taught that the demand for money was represented by k, or 1/v, showing an inverse relationship between the demand for money and velocity; and yet an increase in the demand for money may mean an increase in velocity during specific periods, such as the holiday season, or tax day. I think I might be confusing transactions with velocity; velocity means how many times money changes hand during any given period, while T means how many times goods/services are exchanged for money. EIther way, I'm not sure how an increase/decrease in the demand for money is represented by Quantity theory.

Re: Question about the demand for money with respect to the quantity theory.

nirgrahamUK — Fri, 03 Jul 2009 21:14:23 GMT

Esuric:
the demand for money will also increase as total output increases

can you quote the text of Mises you have in mind on this?

Re: Question about the demand for money with respect to the quantity theory.

Wilmot of Rochester — Fri, 03 Jul 2009 21:10:31 GMT

Add an "all things remaining equal" between the second condition.

If production increases, all things remaining equal (including consumption levels) - then the demand for money should technically increase because people are spending less but receiving the same amount, leaving less money in circulation and more money in their pockets.

Question about the demand for money with respect to the quantity theory.

Esuric — Fri, 03 Jul 2009 17:28:23 GMT

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I'm having a difficult time understanding the demand for money with respect to the quantity theory. As I understand it, it's MV=PQ, where the supply of money times the velocity equals the prices times total output/input/quantity produced. The objective valuation of money, like all things, is solely determined by the supply and demand for money; but the demand for money increases primarily for two reasons, which seemingly contradict each other. Mises claims that in uncertain times, the demand for money will naturally rise, as the current condition is not suitable or safe to engage in transactions, relatively speaking (relative to the future, hence the desire to save); at the same time though, the demand for money will also increase as total output increases, hence the increase in the purchasing power of money (deflation) during economic growth (assuming the money supply is relatively fixed). So if the demand for money increases during prosperous and stagnant periods of economic growth, during periods of increased and decreased velocity how would it be represented/demonstrated by the quantity theory?

Thanks.