lecture10 - Lecture X Economics 202A Fall 2007 Today we...

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1 Lecture X Economics 202A Fall 2007 Today we will turn to something different. We are now going to turn to the demand for money. This is the next item on the reading list. So you can see where this fits in, I just want to remind you of the structure of the course. The structure of the course corresponds exactly to the structure of standard macroeconomics. We first looked at general equilibrium concepts. This corresponds to looking at the intersection of the AD and AS curves, in intermediate macro. After that we are exploring the components of the AD curve. The AD curve is the confluence of the IS and the LM curves. We have just reviewed consumption and investment, which are the leading components of the IS curve. We began the course with the New Classical view of the economy of Lucas, Sargent and Barro. I do not know how Maury is going to pitch the rest of the course. But my interpretation of David Romer&s textbook is that the major theme of the book is that it begins with the classical model and growth theory. And then in the second half ‰ of the book, which is what we are covering in this course, we see time after time after time oversensitivity, relative to that model. So far we have seen that there is oversensitivity of income relative to the money supply. Next Tuesday we will see this oversensitivity in a different context. We will see oversensitivity of the exchange rate relative to the money supply in the lecture next Tuesday. In consumption, investment and finance you will again see, in each case, oversensitivity relative to the classical maximizing model. This gives the textbook a general theme. It is useful to consider standard maximizing models of the business cycle and its
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2 components. But that model never holds exactly. The tell-tale that it is a bad fit is always oversensitivity , or undersensitivity , of the respective variable. There is a remarkable unity here, all pointing in the direction of an economy that is much more Keynesian than a classical model. The first part of this course discusses the general equilibrium of the system. But now we turn to discuss each of the components of that model. Maury and I divided these topics according to what we thought were our respective comparative advantages. The demand for money, and S-s models, were thought to be my comparative advantage, and so we come to that topic now. So let&s now begin the section on the demand for money. One crucial property of the demand for money is its interest elasticity . It is commonly believed that if the interest elasticity is zero, the LM curve will be vertical and fiscal policy has no effect on equilibrium output or on employment. Alternatively, in this view, if the interest elasticity is infinite, the LM curve is horizontal and monetary policy has no effect on equilibrium output or employment.
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lecture10 - Lecture X Economics 202A Fall 2007 Today we...

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