Keynesian Money Market with Liquidity Trap

Keynesian Money Market with Liquidity Trap - Econ 4.3...

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Econ 4.3 Monday, March 29, 1999 Announcements: Homeworks 8 is due on Friday. Answers for the past homeworks are on the web. Online Quzzes for Chapters 10, 11 and 12 will be taken offline on Wednesday, March 31, at 8 am. The exam is next Wednesday. Lecture notes: Keynesian Money Market with Liquidity Trap If the money supply is expanded, the interest rate goes down There comes a point when the monetary policy has no effect on the interest rate and this is the Keynesian Liquidity Trap Monetary Policy Easy Money Policy o increase money supply o reduce interest rate o increase investment o increase GDP o decrease foreign demand for $US
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Unformatted text preview: o dollar depreciates o net exports increase o GDP increases • Tight Money Policy o decrease money supply o raise interest rate o reduce investment o reduce GDP o increase foreign demand for $US o dollar appreciates o net exports decrease o GDP decreases Monetarist Short and Long Run View of Monetary Transmission and Price Level MV = PQ Short Run • Expand MS --> AD shifts to the right • Decrease MS --> AD shifts to the left • Recession Adjustment: prices fall, full employment is restored Long Run • Prices Rise, full employment, GDP doesn't change...
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