By Lawrence White
ISBN-10: 0631212140
ISBN-13: 9780631212140
The concept of economic Institutions covers unfastened banking financial proposal and a theoretical account of the evolution of financial associations.
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Extra resources for The Theory of Monetary Institutions
Sample text
A large and sudden increase of this sort would occur when a large country joins the international gold standard, and goes about acquiring an inventory of monetary gold. A smaller, or more gradual, shift would occur with an increase in the real income of the goldstandard countries. 2), the monetary stock demand curve shifts out from G~ 0 toG ~1" Assuming that the ppg is proximately determined in the monetary stock market (rather than in the flow market), short-run equilibrium moves from E 0 to E 1, and the ppg rises immediately from ppg0 to ppg 1• The only immediate response in monetary stock quantity supplied comes from converting non-monetary stocks of gold (melting down candlesticks and coining them).
This result illustrates the potential vulnerability of the price level to gold supply shocks under a gold standard, a feature often cited as a drawback by the gold standard's critics. The size of the movement in the purchasing power of gold depends on the size of the supply shock, obviously. It also depends on the slopes of the flow supply and demand curves. At a lower ppg, the flow quantity demanded for consumptive uses rises, and this dampens the drop in the ppg. The flatter (more price-elastic) is the non-monetary flow demand curve, the smaller is the change in ppg.
The plot of the film Goldfinger provides one fanciful example: Goldfinger plans to set off a thermonuclear device in Fort Knox to render the gold there useless by radioactive contamination. If we assume that nuking the gold is the equivalent of making it disappear, we can treat the event as a sudden leftward shift in the stock supply curve, and proceed as we did in analyzing demand shifts. ) As Goldfinger intends, the nuking would indeed drive up the value of his own gold stocks. In the long run, however, the higher ppg would encourage extra gold mining, and discourage gold consumption, enough to eventually re-accumulate the lost gold and reverse the effect on the ppg.
The Theory of Monetary Institutions by Lawrence White
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