Which Comes First, Inflation or Stability?

 

Imagine we get incremental money (ΔM) from the “helicopter drop,” so to speak. What would take place soonest?

1)     The Fisherian way: We spend ΔM as soon as possible because “Money is of no use until it is spent” (1930, p.5). A silver lining nevertheless, the increment (ΔM) is never excrement.

2)     The Keynesian way: Our “preference” is to hoard the additional “liquidity” (ΔM) in small rectangular solid pieces of paper or “thin-airy” demand deposits for fear of the “liquidity trap” (1936).

3)     The Hicksian way: The real GDP momentarily shoots up as in M= k∙P∙Y (1937) with P “sticky” and k “constant.”

4)     The Baumolite way: There will be inflation through a double channel; one the increment of Fisherian money of no use (ΔM) and the other the “doubling up” of the velocity of spending (ΔV) (1952).

5)     The Mankiw style in the IS-LM (Macroeconomics, 8th ed. Figure 12-3): At the shockingly-from-outside incremental money (ΔM), GDP rises (ΔY) and the real interest rate falls (-Δr). He explains:

An increase in the money supply shifts the LM curve downward. … Income rises… and interest rate falls…

6)     The Mankiw style in the AS-AD (Figure 10-5 and 10-6): GDP makes an “up-shift” He explains:

[The AD curve] is drawn for a given value of the money supply M. The aggregate demand curve slopes downward: the higher the price level P, the lower the level of real balances M/P, and therefore the lower the quantity of goods and services demanded.

[An] increase in the money supply M raises the nominal value of output PY. For any given price level P, output Y is higher.

Accordingly, we upon the drop of money (ΔM) have a higher real gross domestic production (ΔY): or equivalently, money equals GDP. What a Wonderful World!

7)     The Bernanke style in the IS-LM (Macroeconomics, 8th ed. Figure 9.5): An increase in the money balance (ΔM/ P) shifts the LM curve down while reducing the real interest rate (- Δr).

8)     The Bernanke style in the AS-AD (Figure 9.10 and 9-14): As the AD curve shifts to the right with the price level constant in the short run, the consequence of the money drop (ΔM) is an undisputed increase in GDP (ΔY).

 

In Here on Earth. As each tries to get rid of the useless liquidity, the velocity of all the money supply must increase; none would, could and should eat, wear, burn or otherwise destroy money, useless or otherwise, in hands. Due to a rapid increase in the first place of velocity, it’s the inflation!

             After all, spending is to a piece of cake what production is to all the indefinite hassles. As much remote is the effect on the interest rate "with all kinds of assets considered.”  

             Naturally and logically, the rest of us might, should and would vote for Irving Fisher as in 1) from New Haven and William Baumol as in 4) from Princeton, presumably the middle ground between the fresh water and the salt water.

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