Monetary - March 02

Monetary - March 02 - ISLAND 2 I SLAND 1 Chapter 5: price...

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ISLAND 1 ½ old ISLAND 2 ½ old Chapter 5: price surprises Important policy question: can monetary policy affect output? Money is neutral, if the level (M) of the stock of fiat money does not affect real choices. Money is super neutral if the growth (z) of the stock of fiat money does not affect real choices. Output = N t *y In an environment in which people which people do not produce goods or work, there is no answer to this question. We can only answer if we can affect the real economy. Nty needs to be solved for in order to be able to see what affect the monetary policy has on output. Make N t y Endogenous instead of Exogenous, which it was before. Some Evidence: Inflation and money growth , proportional graph Inflation and output, “Phillips curve”; x-axis: inflation and output, y-axis: unemployment, Inverse relationship Phillips: for the inflation in 1958 with over a century of data Strong, significant statistics relationship between inflation - unemployment rate when output is high, employment is high, unemployment is low
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Monetary - March 02 - ISLAND 2 I SLAND 1 Chapter 5: price...

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