Why Not Just Look at the Money Supply to Calculate Inflation?

Why not just look at the money supply to calculate inflation?

The quantity theory of money is a theory. For a variable as important as consumer prices, it is clearly desirable to just measure it directly rather than appeal to a theory, even if the theory had some truth to it.Besides that, it is also not at all clear what the right measure of money supply would be

— — — — — —

How can an inadequate money supply affect the rate of inflation?

All the talk you see about money supply fails to recognize that paper money is simply a symbol of value.It's just a convenient way to avoid having to carry goats, potatoes and firewood around in order to trade for the things you need.Our ancestors got pretty tired of having to trade commodities for items of like value, so thousands of years ago people began making coins for the purpose of simplifying trade. Coins were eventually augmented by paper money.We work for money, so that we can have the things that we want—not the money itself

— — — — — —

What happens to prices, interest rates and exchange rates in the Dornbusch model of exchange rates when the money supply is increased?

Assuming this is an unanticipated permanent increase in the money supply then prices should rise. The Dornbusch model suggests that the price reaction will be slow. That means in the short run real goods and services are too cheap. To keep things in balance, the financial markets will over-react, that is over-react compared to what they would do if prices reacted immediately. Interest rates will increase and the currency will weaken.Eventually, if nothing else changes, prices will adjust properly, and interest rates will fall while the currency strengthens. Of course, it's never true that nothing else changes; and there are lots of complexities in any real money supply change. So the model is not a precise prediction, it's a general story to explain why currency exchange rates seem to be more volatile than simple economics can explain

— — — — — —

Why are currency and coins held inside banks not considered to be part of the money supply?

It would actually be considered in the money supply if it is in a checkable bank account. This is still considered M1 money (which is what economists count as the money supply). What is, however, not considered in the money supply are those in savings accounts. These are considered "near-money" and are considered M2. Bank reserves are also not considered to be M1 money. This is probably what you are talking about in regards to currency and coins "held" inside banks. They may be talking about reserves.

— — — — — —

how is money supply can be increased?

Any country put money on the street (print money) when the GPA (the value of all goods in the country) raised, if not, that new money produces inflation

— — — — — —

If the Federal Reserve goal is 2% inflation every year and money supply expansion, why not just buy assets? They are purposely devaluing USD and intend for prices to double again in 20 years.

Oh but if life was so simple that 'just doing this," or 'just doing that" would accomplish what some wish to be done.The value of the US dollar (aka USD) is determined in the global currency markets against a basket of six other global currencies. To be 'devalued" means that an awful lot of traders would have to reduce its price. Something the Fed cannot, on its own, actually do. The Fed has set a target of 2% inflation. But neither rising, nor falling interest rates are the key to inflation; inflation in the classic 'too much money chasing too few goods" tends to come about because of rising labor costs. Interest rate fluctuations are a reflection of inflation and not the cause of it. Presuming otherwise is to get the cart before the horse. While the Fed could presumably influence (not set) interest rates by buying or selling treasuries, doing so would only influence the open treasury markets (which trade about $1 Trillion worth of treasuries each day) where the price of treasuries would either reflect that buyers and sellers vary their price, which in turn is reflected in their yield. When more in demand, the price of treasuries goes up and yields go down (because treasuries have a 'face value" of fixed value at redemption)The Fed has already gone on record as stating that the reason they want some inflation is so that wages rise 'to keep up with inflation." Absent any inflation (a zero-inflation environment such as we've had for the past few decades) will leave the wages of the un- and semi-skilled stagnating, which tends to promote some degree of social unrest (and the election of populist presidents, apparently). The facts are these: 1) there are more un- and semi-skilled laborers and potential laborers than industry can every hope to absorb, and as long as there's a warm and willing body unemployed and willing to do the work, management has no incentive to raise wages. 2) not all wages have stagnated. Those with skill have seen wages increase all along. 3) Likewise those with advanced educations in critical job categories. Given a zero-inflation environment, no one gets a wage increase for 'longevity" or 'to keep up with inflation when there is no inflation." And the world is full of un- and semi-skilled workers. Always. And it's the nature of jobs to require greater and greater skill sets over time. To really devalue the USD, it takes inept politicians leading the country, cutting taxes, and starting pointless wars. That will get currency markets thinking and believing that the country is on the wrong path. The USD lost 45% of its value during the Bush 43 years; gasoline prices quadrupled. During the (relatively sane) era of Obama, by contrast, when the deficit was being reduced year over year, the USD regained 45% of its value. The market symbol for the USD versus a basket of six other global currencies is DXY (or $DXY) and anyone can pull a long term chart and see for themselves what different administrations have done to it. And the Fed had very little, or nothing to do with that process. It's all about responsible versus irresponsible governing.If the Federal Reserve goal is 2% inflation every year and money supply expansion, why not just buy assets? They are purposely devaluing USD and intend for prices to double again in 20 years