Download Irving Fisher - History of Economic Thought - Lecture Slides and more Slides Economics in PDF only on Docsity! Irving Fisher docsity.com Irving Fisher (1867-1947) • The Rate of Interest, 1907 • The Theory of Interest, 1930 • The Purchasing Power of Money, 1911 • Mathematical Investigations in the Theory of Value and Prices, 1925 docsity.com Diagrammatic Utility Maximization Good Y Good X Indifference Curves Budget Constraint Consumer’s Choice docsity.com Production Possibilities Frontier • Fisher introduced the familiar graph of the Production Possibilities Frontier Good Y Good X Production Possibilities Frontier Slope = Price of X/Price of Y Producer’s Choice docsity.com Production • For the case in which the amounts used in production of the various resources are fixed, Fisher showed that the producer maximizes profits by producing at that point on the PPF that has slope equal to the price of the good shown on the horizontal axis in terms of the good shown on the vertical axis. Good Y Good X Production Possibilities Frontier Slope = Price of X/Price of Y Producer’s Choice docsity.com Interest rate • Fisher built on the ideas of John Rae and Eugen von Böhm-Bawerk to construct the modern theory of interest. • He did this by inserting the production possibilities frontier, the maximum value line, and the indifference curves in the same graph and re- labeling the two goods as consumption now and consumption later. • Along the way, he showed how the Walrasian general equilibrium model could contain behavior such as saving and investment. docsity.com Quantity theory of money • Although Fisher did not add to the classical Quantity Theory of Money, he expressed the theory by the now familiar equation M V = P T. – Here M is the quantity of money, V is the velocity of money or the number of times the average dollar changes hands in, say, any given year, P is the value of the average transaction, and T is the number of transactions. – For simplicity, the equation is sometimes expressed as M V = P Y. In this case, P is the average level of prices of final goods and Y is the gross domestic product.) • Fisher saw this equation as a tautology that becomes the Quantity Theory when V and T (or, Y) are assumed to be unaffected by changes in M. • In that case any change in M makes P change in the same direction and by the same percentage. docsity.com Fisher effect • Fisher showed that expected changes in asset prices have no effect on the economy • unexpected changes might have an effect. • Fisher clearly distinguished between real and nominal interest rates, and between expected and actual inflation in deriving the Fisher equation: • nominal interest rate = real interest rate + expected inflation. • He also made the argument that in the long run expected and actual inflation would be equal. docsity.com
