Macroeconomic Theory Of Inflation

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Among the various cornerstones of macroeconomic theory, one finds Inflation held at high helm of affairs. There is a vast literature spanning across centuries treating the subject matter and as usual with epochs the meaning and significance of the word “Inflation” seems to have changed. For many years the word Inflation was not a statement about prices rather a condition of paper money, which is a description about monetary policy. A testimony of it can be seen via these two quotes: Inflation is the process of making addition to currencies not based on a commensurate increase in the production of goods. —Federal Reserve Bulletin (1919) Most prominent among these inflationary forces were a drop in the exchange rate of the dollar, a considerable…show more content…
The attack on bullionism led classical economists to stress that money had no intrinsic value and it played a role only in facilitating exchange. The quantity theory of money depicts quantity equations equating a flow on money payments to flow of goods and services. From the time of Smith to the great depression, the transaction version formulated by Newcomb (1885) and popularised by Irving Fisher (1911) and the Cambridge cash-balance approach developed by Pigou (1911) remained dominant. The difference b/w the two can be understood by simply understanding that in the former “act of purchasing by money” assumes significance while in the later “possession of purchasing power interim between sale and purchase” is emphasized. The QTM takes for granted that the real quantity rather than the nominal quantity of money is what ultimately matters to holders of money and, second, that in any given circumstances people wish to hold a fairly definite real quantity of money. So starting from an equilibrium situation (nominal quantity they hold correspond to real quantity at…show more content…
Tobin and Mill also emphasized that the way the quantity of money is increased affects the outcome in some measure or other. Say, if the newly printed money is spent on the first round for goods and services, it adds directly at that point to the demand for such goods and services, whereas if it is spent on purchasing debt, or simply held temporarily as a buffer stock, it delays effect on the demand for goods and services. One way to characterize the Keynesian approach in the wake of the great depression (1929) is that it gives almost exclusive importance to the first-round effect by putting primary emphasis on flows of spending rather than on stocks of assets whereby one does invoke the non-neutrality of money to stimulate employment and output

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