Economists don't typically emphasize that so much and they try to make it more into a proper economic theory by using something they call the Quantity Theory of Money. Now you've all seen this, the Quantity Theory of Money. And it's usually used as a story about why you need to control the issue of money. Because if you don't you're going to get inflation or something like that. Okay, so this is the quantity of money here, this is the velocity of money here, this is the price level and this is aggregate transactions. Expressed in M changes, you have this. And the emphasis usually in this story, is on these two terms here. If you think of the velocity of money as fixed in institutional terms, it has something to do with the mechanisms of exchange, it's getting kind of warm in here. And you think of transactions as having to do with sort of the real side of the economy. So neither of these things has to do with money very much. Then you think that this term determines that term. So here you see the tension in this understanding of money. That if the government overdoes it. Okay, if the government tries to print too much money, it's actually just going to cause inflation. The constraint on government over issues. So this whole theory is there, in a way, to help us resolve our anxiety about the power of the state. There's this power of the state to say, I can say what's money, and you say, well you can but you can't say what it's worth, okay. That if you start to print too much of it, it's going to burn a hole in our pocket, and it's going to be inflated away, okay. And so, that's where people get very heated about the quantity theory of money if you've noticed. And it's not really typical that people get heated about economic theories. And so where is that coming from? And I think it's coming from this sort of deep anxiety about the power of the state and little green pieces of paper that are worthless, okay, having positive value but maybe not having positive value. If there's hyperinflation, it could just all go away tomorrow and so there's a kind of anxiety about that, the elasticity and discipline. And this is the way that economists regulate their anxiety. They put it into a little equation here, and talk about it, okay? That we can understand that if we just limit the ability of a state to issue excess money, we can maintain its value, it's not going to inflate away. It's not the government only, remember we've had this course, the government isn't the only issuer of money, there's also bank money, right? And if you think that the quantity of money causes price changes then it should also be the quantity of bank money that causes price changes too. Okay, so this same anxiety about too much money causes prices, should lead you to be worried about bank money as well. In practice, there seems to be less of that because bank money seems to be a promise to pay the ultimate money. It seems to be a form of credit instead of, so the government is mainly to blame here. But I think that's not, when you think about the hierarchy of money, remember that it fluctuates out and in, and out and in. What that means is, that velocity is not a constant, okay? That during an expansion, the private money supply expands, along with transactions even if the government money supply doesn't do anything, okay? The only way this equation makes sense, if that happens, is if velocity increases, okay? So, you get more transactions for a given amount of currency because there is an expansion of the product money supply. So, we're not going to talk too much about this equation here. I just didn't want it to be sitting here as a sort of guide to the economy without some link to the more complicated and sophisticated stuff that we're doing in the class. This is all here now to now move to the exchange rate.