The Monetary Mechanism
Arnold continues to surprise me. In reply to Scott Sumner, my co-blogger asks: “[I]f you suddenly found yourself with twice as much cash in your wallet, would you double your spending?”
This is a good question, but it has a standard textbook answer. If you added $100 to my wallet, I would put it in the bank (or cancel a cash withdrawal, which amounts to the same thing). The bank would then increase its lending by ($100 minus reserve requirements), and before long broader measures of the money supply (from M1 to Arnold’s M75) would grow by $100 multiplied by their respective money multipliers. You reach the new equilibrium when you re-establish the old ratio between nominal GDP and the monetary base.
Arnold’s correct to point out that there’s a lot of noise in the system. Velocity fluctuates. But I don’t see why that should change our prediction of the marginal effect of printing more money.