Damnn it is so easy when you're explaining .....though English is not my first language,yet i understood this so much better than my cfa tutor... You are amazing....
I love the fact that there are young women and men interested in economics But first understand who advanced the Quantity Theory of Money. David Hume, first advanced it in his Essays, Moral, Political, and Literary, Part II, London, 1752, he held prices of commodities depend on the amount of money in circulation, rather than the amount of money in circulation depending on prices of commodities. Globalization and expanding trade entails we examine money and how it works in society. The theory is examined thoroughly in the Contribution of Political Economy, 1859, pp. 160-64, Karl Marx. Now understand its importance: Money drives trade for a nation. Trade requires money, not paper-money, it requires Gold as a commodity to be money, universal money. Why, very easy to understand, the sum of values in commodities must be reconciled accurately by some other commodity that is divisible to account for aliquot proportions of values in exchange (trade). The quantitative relation is that gold backs up the currency. But the value relation contained in commodities does not change because money has come into creation. As a commodity itself, gold, contains the value relation of all commodities, and expresses their values in varying measures or quantities. Gold then becomes the dominant form of value and this is a qualitative relation to understand the difference between paper-money and Gold as the money-commodity. Consequently, all products and and their labors respectively are resolved in gold. The more gold is produced the less is the value contained in commodities and conversely, the more rare gold becomes the greater are the values contained in commodities. We are comparing one commodity for another commodity by way of value, thus the question become what is value as we delve deeper into the mystery of money? Food for thought.
Hi, maybe you can do a video that briefly explains why gold is no longer an appopriate currency, since lately in politics it's been mentioned a few times. This equation perfectly illustrates why.
%change (M*V) is not equal to %Change M + %change V for instance if I had %5 * (100*3) = 300* 5% = 15 but 5%*100 + 5%*3 = 5.15, so they are not the same. Am I missing something in your presentation?
Actually strictly speaking the math does not work. You can show this if you do the math with algebra and multiple out the terms in both equations. The % + formula is an approximation of the % * formula and will give close results for small percentage delta changes.
Velocity is how freuently a unit of money changes hand to be strict, that is average value of transactions made with a unit of money in the given time period.
This equation does not represent what necessarily happens in a given economy, what it represents is what would be required for proper circulation of value in a given economy. If overall spending value falls below the overall production of value via commodities, or vise versa, it may land the market in a progressive crisis.
Irving Fisher explained the Quantity Theory of Money and said it would be applicable to a Fixed Closed Static Economy, or an economy operating at maximum potential with full employment, one in which Supply could not expand to meet additional Demand, which were already at optimum. In THAT scenario, adding $$ theoretically directly causes pointless inflation like adding water to a full bucket spills over the side. (But what about a leaky bucket?) In that sense, QTM is a tautology. If you FIX all the variables except quantity and prices (ASSUME velocity & time are static), then adding more quantity of money MUST equal higher prices, by simple algebra. Fisher pointed out in his notes that this Fixed Closed Static Economy is a mental exercise which should NEVER be applied as-is to a real functioning economy which typically CAN and DOES grow and hire to absorb more Demand. In a normal capitalist economy, which is 'static' but stuck in under-performance -- and pushes people into forced idleness, and calls that "efficiency" -- adding money for infrastructure or public service jobs or even military expansion, pushes unemployment down. Mainstream economics begins with the ASSUMPTION (a) that a given economy *IS* operating at Max Capacity prior to any fiscal decisions. Mainstream economics has published Fisher's views on QTM while ignoring Fisher's inconvenient points, which arose AFTER being wiped out to complete destitution in the Great Depression collapse.
Well being that our economy is based on debt money that has to be constantly created, prices that are controlled by mega corporations via mass production, and bs trade agreements with other countries, and then add that to the fact that practically all the same wealthy groups of people control the the banks, corporations, and influence trade agreements. . it boils down to the theory of price equilibrium being as useful as counting sand at a beach during a hurricane.
If money demand function is Md=1000+0.25y-1000i a) Suppose that P = 100, Y=1000 and i= 0.10 Find real money demand, nominal money demand and velocity Please help🙏
Hasn't QE proven the Quantity Theory incomplete or completely wrong? As base money expanded in QE, it never translated into consumption spending or inflation, so the velocity basically crashed to zero. This means there is little connection between the expansion of base money, and the amount of dollars spent on goods and services. Following the accounting explains why. When The Fed purchases a Treasury from a bank, it is an asset swap, and bank liabilities don't change. Bank liabilities, deposits, represent the purchasing power of households and companies. Since QE doesn't directly expand bank liabilities, it can not cause inflation. The equation is missing, (1) the role of Treasury deficit spending as the final step in "money printing", and (2) the role of credit money, which can expand and contract independent of reserve positions.
In the long run the Quantity Theory of Money generally holds but in the short run Nominal Rigidity affects price level's reaction to the change in the money supply.
Luis Mijares I do not believe it is a case of price and wage stickiness, although inflation expectations certainly influence both of those. The Quantity Theory is fundamentally flawed, and is only a useful tool after-the-fact to measure velocity. The known variables are monetary base and GDP, velocity is entirely independent of the equation. Hence why QE simply caused the velocity to crash with no affect to GDP, or prices. research.stlouisfed.org/fred2/series/M2V The major flaws in the theory are related to a misunderstanding of how money enters aggregate demand - consumption. Bank lending is endogenous and is not contained by the monetary base. Indeed, bank lending comes before an increase in the monetary base, since The Fed must defend its short-term rates against the demand for reserves. This is why the Money Multiplier is also a false assumption. The loan comes first, then the reserves - the multiplier has it backwards. research.stlouisfed.org/fred2/series/MULT The purchasing power of consumers is represented as bank liabilities, demand deposits (liquid assets of households and companies). When the Fed purchases assets from primary dealers, there is absolutely no expansion of bank liabilities - no expansion of the purchasing power of households or companies. Since monetary base expansion does not directly change the purchasing power of consumers, it _can not_ directly cause inflation, or changes in demand. The Theory is incomplete. So what expands bank liabilities - demand deposits? Only three things (1) Treasury deficit spends. (2) Households take on debt, or (3) Savers decide to convert savings into consumption. None of these variables are accounted for in the Quantity Theory. ;)
The monetarists believe that velocity is constant in the sense that as soon as money balances increase they are spent. Monetarists do not believe money is a store of value and is therefore spent as soon as it is received. In recent times QE has lead to banks saving; the money is circulating with a great velocity in all areas but what usually happens is that you see spikes in the prices of particular markets such as the housing market in the UK or recently the bond market.
TZA Rem _"The monetarists believe that velocity is constant "_ I'm not sure how they could believe that velocity is constant, it fluctuates significantly, and has recently totally collapsed, as has the money multiplier. In my opinion, you can solve for velocity, but using a constant velocity to solve for anything is silly. _"Monetarists do not believe money is a store of value and is therefore spent as soon as it is received"_ I agree with this, i analogize money as a "hot" potato. =) _"In recent times QE has lead to banks saving"_ How are banks _"saving"_ when The Fed purchases one of their assets. It is a net zero change in their balance sheet. In most cases, The Fed purchases a short-term treasury - recently, the rates on reserves and treasuries have been identical, so QE has a net zero overall effect on banks, or spending (reserves do not leave the banking system.) If The Fed is engaging in a interest-rate policy, it can not control the quantity of money in circulation, it can only control its price. Meaning, QE does nothing unless banks and borrowers create loans. Liabilities of banks represent the purchasing power of households and business. Reserves (QE) are assets of banks and do not contribute to consumption (aggregate demand). What am i missing? ;)
You're absolutely right but I think you read too much into what I said. Banks haven't been lending out the windfall gained in QE and are in effect saving the money. This is evident by the negative yields in the eurozone; the deposit facility has meant that banks look to sovereign debt to store money (as well as the ECB draining liquidity): bottom line is, QE has not effectively lead to an increase in the money supply. - that is the point I was trying to make. Monetarists believe that money is spent as soon as it is received and therefore velocity should be constant in the fisher equation. Keynesians dispute this due to the liquidity preference argument but both agree that money supply must rise as a result of inflation; it is a reverse causation argument
Money is just debt. What is it that can possibly fill the space between giving and receiving, be infinitely weightless and therefore freely/cheaply transferrable back and forth across the great expanse of the world's trading systems? Debt. Money is debt. If you tried to make it out of anything else, within 1 single day of actually trying to use it, you'd rationalize it down to its most basic element, which is debt. And the good thing about that? Debt money solves the problem of money *and* debt: money which is created when a person goes into debt is obviously money that he does not have to "borrow" from anyone else and therefore should not have to pay interest (competitive fees excepted). Naughty capitalism, naughty capitalists. If you had an 'infinite amount of debt', then the clowns would have been in charge of the system and we'd have to figure out who to blame for the fact that nobody but the super-rich knows how the system works.
Its nice to see a young student display such a well organized video over a topic. Thanks for your upload girlie
Making economics as easy as trowing a rock. Well done!
Amazing video. I had to figure out what the Price level was, and the 4 Forumlas at 3:39 just answered that. thank you so much!
Nice job Jodie! Your explanations are always well thought-out and clearly explained.
Excellent explanation ... really helped with understanding the quantity equation.
Hi. What do you mean when you say" each unit of currency needs to change 3 times"? Do you mean in a per dollar basis or the 8000 dollar as a whole?
@maxkytube I added a video response that addresses this point.
What is relastionship btween stock and flow of money and also explin how critisize fisher theory of money never be more realistic ???
Thank u so much! Ur video is really easy to understand, actually, it's better than what I learnt from my history of econ thoughts teacher!!!
Damnn it is so easy when you're explaining .....though English is not my first language,yet i understood this so much better than my cfa tutor...
You are amazing....
I love the fact that there are young women and men interested in economics
But first understand who advanced the Quantity Theory of Money.
David Hume, first advanced it in his Essays, Moral, Political, and Literary, Part II, London, 1752, he held prices of commodities depend on the amount of money in circulation, rather than the amount of money in circulation depending on prices of commodities. Globalization and expanding trade entails we examine money and how it works in society. The theory is examined thoroughly in the Contribution of Political Economy, 1859, pp. 160-64, Karl Marx.
Now understand its importance: Money drives trade for a nation. Trade requires money, not paper-money, it requires Gold as a commodity to be money, universal money. Why, very easy to understand, the sum of values in commodities must be reconciled accurately by some other commodity that is divisible to account for aliquot proportions of values in exchange (trade). The quantitative relation is that gold backs up the currency. But the value relation contained in commodities does not change because money has come into creation. As a commodity itself, gold, contains the value relation of all commodities, and expresses their values in varying measures or quantities. Gold then becomes the dominant form of value and this is a qualitative relation to understand the difference between paper-money and Gold as the money-commodity. Consequently, all products and and their labors respectively are resolved in gold. The more gold is produced the less is the value contained in commodities and conversely, the more rare gold becomes the greater are the values contained in commodities. We are comparing one commodity for another commodity by way of value, thus the question become what is value as we delve deeper into the mystery of money?
Food for thought.
I would be very much interested in learning what are the factors on which Velocity of Money depends and how it can be influenced.
I wanted to learn how economy works. Will b listening to u more often.
Hi, maybe you can do a video that briefly explains why gold is no longer an appopriate currency, since lately in politics it's been mentioned a few times. This equation perfectly illustrates why.
%change (M*V) is not equal to %Change M + %change V
for instance if I had %5 * (100*3) = 300* 5% = 15
but 5%*100 + 5%*3 = 5.15, so they are not the same. Am I missing something in your presentation?
how do you get + from * in the % part?anybody can tell me please
+Jason Lau think of it as ln(mv)=ln(m)+ln(v)
Actually strictly speaking the math does not work. You can show this if you do the math with algebra and multiple out the terms in both equations.
The % + formula is an approximation of the % * formula and will give close results for small percentage delta changes.
where I can contact you if any confusion occurs regarding economics
How does capacity utilization factor into the Quantity Theory of Money?
this has been useful..my exam is tomorrow i'll be sure to attempt a question on the quantity theory if it comes as part of the options.. thanks :)
👏🏽👏🏽👏🏽great explanation
@maxkytube
Take the natural log of %change(MV)=%change(PY) to get the last equation. its the product rule of natural logarithms
Velocity is how freuently a unit of money changes hand to be strict, that is average value of transactions made with a unit of money in the given time period.
This equation does not represent what necessarily happens in a given economy, what it represents is what would be required for proper circulation of value in a given economy. If overall spending value falls below the overall production of value via commodities, or vise versa, it may land the market in a progressive crisis.
Irving Fisher explained the Quantity Theory of Money and said it would be applicable to a Fixed Closed Static Economy, or an economy operating at maximum potential with full employment, one in which Supply could not expand to meet additional Demand, which were already at optimum.
In THAT scenario, adding $$ theoretically directly causes pointless inflation like adding water to a full bucket spills over the side. (But what about a leaky bucket?)
In that sense, QTM is a tautology. If you FIX all the variables except quantity and prices (ASSUME velocity & time are static), then adding more quantity of money MUST equal higher prices, by simple algebra.
Fisher pointed out in his notes that this Fixed Closed Static Economy is a mental exercise which should NEVER be applied as-is to a real functioning economy which typically CAN and DOES grow and hire to absorb more Demand.
In a normal capitalist economy, which is 'static' but stuck in under-performance -- and pushes people into forced idleness, and calls that "efficiency" -- adding money for infrastructure or public service jobs or even military expansion, pushes unemployment down.
Mainstream economics begins with the ASSUMPTION (a) that a given economy *IS* operating at Max Capacity prior to any fiscal decisions.
Mainstream economics has published Fisher's views on QTM while ignoring Fisher's inconvenient points, which arose AFTER being wiped out to complete destitution in the Great Depression collapse.
Great video!
Whenever money changes commodity and services also change and hence v has no relevance in the equation.
Well being that our economy is based on debt money that has to be constantly created, prices that are controlled by mega corporations via mass production, and bs trade agreements with other countries, and then add that to the fact that practically all the same wealthy groups of people control the the banks, corporations, and influence trade agreements. . it boils down to the theory of price equilibrium being as useful as counting sand at a beach during a hurricane.
That was very informative, thank you for help!
Greatly explained
awesome explaination
Is friedmen and chicago quantity theory of money are same?
Yes. Because of the Chicago school of Economics were Friedman taught
Very helpful! thanks
If money demand function is
Md=1000+0.25y-1000i
a) Suppose that P = 100, Y=1000 and i= 0.10 Find real money demand, nominal money demand and velocity
Please help🙏
Hasn't QE proven the Quantity Theory incomplete or completely wrong? As base money expanded in QE, it never translated into consumption spending or inflation, so the velocity basically crashed to zero. This means there is little connection between the expansion of base money, and the amount of dollars spent on goods and services.
Following the accounting explains why. When The Fed purchases a Treasury from a bank, it is an asset swap, and bank liabilities don't change. Bank liabilities, deposits, represent the purchasing power of households and companies. Since QE doesn't directly expand bank liabilities, it can not cause inflation.
The equation is missing, (1) the role of Treasury deficit spending as the final step in "money printing", and (2) the role of credit money, which can expand and contract independent of reserve positions.
In the long run the Quantity Theory of Money generally holds but in the short run Nominal Rigidity affects price level's reaction to the change in the money supply.
Luis Mijares
I do not believe it is a case of price and wage stickiness, although inflation expectations certainly influence both of those. The Quantity Theory is fundamentally flawed, and is only a useful tool after-the-fact to measure velocity. The known variables are monetary base and GDP, velocity is entirely independent of the equation. Hence why QE simply caused the velocity to crash with no affect to GDP, or prices.
research.stlouisfed.org/fred2/series/M2V
The major flaws in the theory are related to a misunderstanding of how money enters aggregate demand - consumption. Bank lending is endogenous and is not contained by the monetary base. Indeed, bank lending comes before an increase in the monetary base, since The Fed must defend its short-term rates against the demand for reserves. This is why the Money Multiplier is also a false assumption. The loan comes first, then the reserves - the multiplier has it backwards.
research.stlouisfed.org/fred2/series/MULT
The purchasing power of consumers is represented as bank liabilities, demand deposits (liquid assets of households and companies). When the Fed purchases assets from primary dealers, there is absolutely no expansion of bank liabilities - no expansion of the purchasing power of households or companies. Since monetary base expansion does not directly change the purchasing power of consumers, it _can not_ directly cause inflation, or changes in demand. The Theory is incomplete.
So what expands bank liabilities - demand deposits? Only three things (1) Treasury deficit spends. (2) Households take on debt, or (3) Savers decide to convert savings into consumption. None of these variables are accounted for in the Quantity Theory. ;)
The monetarists believe that velocity is constant in the sense that as soon as money balances increase they are spent. Monetarists do not believe money is a store of value and is therefore spent as soon as it is received. In recent times QE has lead to banks saving; the money is circulating with a great velocity in all areas but what usually happens is that you see spikes in the prices of particular markets such as the housing market in the UK or recently the bond market.
TZA Rem
_"The monetarists believe that velocity is constant "_
I'm not sure how they could believe that velocity is constant, it fluctuates significantly, and has recently totally collapsed, as has the money multiplier.
In my opinion, you can solve for velocity, but using a constant velocity to solve for anything is silly.
_"Monetarists do not believe money is a store of value and is therefore spent as soon as it is received"_
I agree with this, i analogize money as a "hot" potato. =)
_"In recent times QE has lead to banks saving"_
How are banks _"saving"_ when The Fed purchases one of their assets. It is a net zero change in their balance sheet. In most cases, The Fed purchases a short-term treasury - recently, the rates on reserves and treasuries have been identical, so QE has a net zero overall effect on banks, or spending (reserves do not leave the banking system.)
If The Fed is engaging in a interest-rate policy, it can not control the quantity of money in circulation, it can only control its price. Meaning, QE does nothing unless banks and borrowers create loans. Liabilities of banks represent the purchasing power of households and business. Reserves (QE) are assets of banks and do not contribute to consumption (aggregate demand).
What am i missing? ;)
You're absolutely right but I think you read too much into what I said. Banks haven't been lending out the windfall gained in QE and are in effect saving the money. This is evident by the negative yields in the eurozone; the deposit facility has meant that banks look to sovereign debt to store money (as well as the ECB draining liquidity): bottom line is, QE has not effectively lead to an increase in the money supply. - that is the point I was trying to make.
Monetarists believe that money is spent as soon as it is received and therefore velocity should be constant in the fisher equation. Keynesians dispute this due to the liquidity preference argument but both agree that money supply must rise as a result of inflation; it is a reverse causation argument
V clear and useful
Thank you!
Ma'am you are 🔥
you saved my life
exactly!
Don't stand right in front of the equations. Otherwise, great video.
stfu
you are perfect
great
Brrrriillliiant!
thanks mam
I LOVE YOU MAM YOU ARE TEACHING NICE THANKS
You're frikkin awesome
The Quantity Equation, babies !
Do you have a subscribe button. Very clear explanations given.
yeah can you make somewhat more understandable for us who dont get it
love u yarr
can u please move away from the board when teaching
Money is just debt. What is it that can possibly fill the space between giving and receiving, be infinitely weightless and therefore freely/cheaply transferrable back and forth across the great expanse of the world's trading systems? Debt. Money is debt. If you tried to make it out of anything else, within 1 single day of actually trying to use it, you'd rationalize it down to its most basic element, which is debt. And the good thing about that? Debt money solves the problem of money *and* debt: money which is created when a person goes into debt is obviously money that he does not have to "borrow" from anyone else and therefore should not have to pay interest (competitive fees excepted). Naughty capitalism, naughty capitalists.
If you had an 'infinite amount of debt', then the clowns would have been in charge of the system and we'd have to figure out who to blame for the fact that nobody but the super-rich knows how the system works.
hey, you kind of look like that girl from spiderman 1, except brunette...
the nasally voice is just too distracting...
अंग्रेजी समझ नही आती हमें
WTF was that opening slide XDhaha
its all around the outside of the board aswell lol
Thanks mam