Wednesday 261007

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 Money Growth and Inflation
Section 8 of 29
…
In Figure 2, after an increase of quantity of money by the Fed, how does the economy move from the old equilibrium A to the new equilibrium B?
The immediate effect of an increase of quantity of money is creation of an excess of money supply.
Before the injection of additional money the economy was in equilibrium at point A.
After the injection of additional money the economy is in equilibrium at point B.
…
At the original price level of 2, people had exactly as many dollars in their pockets as they wanted.
The new increased quantity of money increases demand for goods (and services).
However, the economy's capacity to supply goods has not changed.
The economy's output of goods is determined by the available human capital, physical capital, natural resources, and technological knowledge.
None of these has been changed by the increased quantity of money.
…
With the new greater quantity of money
· the now-greater demand for goods due to more dollars in pockets
· causes goods become short in supply
· which causes the prices of goods to increase
· prices are bid up, from 2 to 4
The price level increase, in turn
· increases the quantity of money demanded
· because people need more dollars for every transaction
…
Eventually, the economy reaches a new equilibrium, point B, at which the quantity of money demanded again equals the quantity of money supplied.
People are then able to buy the same amount of goods at equilibrium point B
as when the equilibrium was point A.
Prices have doubled along with the doubled quantity of money.
This is how the overall price level for goods adjusts to bring into balance money supply and money demand.
… …
people need more money
hitobito wa motto okane ga hitsuyō
人々はもっとお金が必要
… …
Essentially, prices go up but incomes also go up so people can afford to buy the same amount of goods after the money supply and inflation have increased? ChatGPT:
Yes, in Mankiw’s classical long-run model, if the money supply doubles while real output remains unchanged, prices eventually double and wages and incomes also double.
Thus, although people have twice as many dollars and goods cost twice as many dollars, their real purchasing power is essentially unchanged, so they can buy about the same quantity of goods and services as before.
This is the idea of monetary neutrality.
During the adjustment period, however, prices and incomes do not necessarily rise at the same time or by the same amount.
Prices generally rise faster than incomes at first.
This is because businesses can change prices quickly while wages are often fixed by contracts, annual raises expectations, and time taken for income-increase negotiations.
During that early period, workers’ real purchasing power falls.
… …
Does this incomes-lag-behind-prices outcome mean businesses prefer an increasing money supply? CGPT:
Some businesses may benefit temporarily if their selling prices rise before wages and other costs catch up, which can increase profit margins, and firms with fixed-rate debt may benefit from unexpected inflation.
But sustained rapid money growth and inflation also bring higher input costs, higher interest rates, sales decrease, greater uncertainty, and less predictable planning.
So, businesses generally benefit more from stable, predictable inflation than from continually accelerating money growth.