Sunday, December 29, 2013

Seinfeld Economics - Monetarism

One theory of inflation is called monetarism. This theory says that inflation is always present and that it is a monetary problem. This theory also says that the amount of money that exists will determine the amount of money that people spend. The idea is that the price of items will go up only if the supply of the items is lower than the demand for the items. The price of items will also go down if the demand for the items is higher than the supply of the items.
This theory also says that since the amount of spending is determined by the amount of money in circulation the demand for items can be determined by calculating the amount of money in existence. Because of this theory, one could assume that if the amount of money in circulation goes up so does the amount of spending and so does the demand for consumer goods. Using this theory, the only reason that prices would go up is if the amount of money in circulation goes up.
Another theory of inflation is called the rational expectations theory. This theory says that inflation has to be looked at as a long-term projection and not just due to the here and now. Although it is a lot like monetarism the rational expectations theory believes that the monetarism theory reacts too quickly to what is occurring now and that what happens down the road is more important. One reason that the rational expectations theory wants to avoid reacting too quickly to slight changes in inflation is that when people react too quickly they often cause drastic changes in inflation simply by trying to avoid them.
The Austrian theory of economics says that as people will spend more money as they get more money to spend. This is kind of a spend what you earn philosophy. The lifestyle and spending habits of people are equal to their disposable income. This theory is different from the others because it doesn't believe that the production of goods will increase in order to meet an increase in demand. This theory believes that these kinds of changes in the economy don't happen as quickly as some of the other theories believe they do. And this theory also believes that the distribution of goods and money will not always seek to achieve some sort of balance.

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