First post in ages

While I have been bogged down in economics finals, I decided to post something to break the silence. Today's lesson is the relationship between money supply and output, a concept which was not understood before the 60's and Milton Friedman.

In short, the relationship is governed by a balanced equation where the change in money supply time the velocity(how fast money circulates in an economy) is equal to the change in output time the change in prices. In other words MS*V=Q*P. Thus if the money supply rises, either price or output, or both must rise to match the increase. The effect of this relationship is that inflation and deflation are better understood as products of MS, rather than being arbitrary. Also, if money loses enough value that it ceases to be circulated much, then serious deflation occurs, as happened during the early days of American Banking. The goal of an economy should be to balance these forces out to keep output rising without increasing inflation outside of comfortable levers(circa 3%). For much of the 90's we were in such a pattern, but the collapse of the housing market and the lowering of interest rates to 2% increased prices and a slight amount of output, but since P was greater than Q, real inflation occurred.