Lesson+8--Money+and+the+Economy

Lesson+8--Money+and+the+Economy - Lesson 8: Money and the...

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Unformatted text preview: Lesson 8: Money and the Economy Chapter 18--M&B Section on Money-Growth Rules (p392-394) Milton and Money Stock Control, William Poole (FRBSL July 30, 2007) http://www.stls.frb.org/news/speeches/2007/07_31_07.html Any I dea Why M1 surged in the fall of 2008? M2 surged in the aftermath of the Lehman bankruptcy Why? Money Supply Growth and The Business Cycle. M1- PRI MARY TARGET OF THE FED Helicopter BenWhat is this about?- Back in 2003 he was the gov of the FED. Money was dropped out and found it in the waller after dropping, will spend more money. The productivity didnt increase m spending more would increase the prices and increase the inflation. People were making fun of Bernanke back then. M oney-Gr owth Rules M oney-Gr owth Rules The first type of rule proposed by The first type of rule proposed by monetarists in 1960s was the money- monetarists in 1960s was the money- growth rule growth rule A A money gr owth r ule money gr owth r ule focuses only on focuses only on the growth rate of money in the long the growth rate of money in the long run, ignoring short-run fluctuations- run, ignoring short-run fluctuations- Milten Freedman was the leading Milten Freedman was the leading advocate of this. advocate of this. Example Example : money growth = 3% every : money growth = 3% every year year Such a rule is based on the equation of The Equation of Exchange The Equation of Exchange The The equation of exchange equation of exchange is based on is based on idea that the money in circulation must idea that the money in circulation must be used a certain number of times to be used a certain number of times to support a given amount of spending- our support a given amount of spending- our GDP is greater than money supply for GDP is greater than money supply for this reason because money has to be this reason because money has to be turned over certain times. turned over certain times. M M V = P V = P Y ( N ominaL GDP= P*Y) Y ( N ominaL GDP= P*Y) Velocity Velocity = number of times the average = number of times the average dollar is spent on final goods and dollar is spent on final goods and services services M oney-Gr owth Tar gets M oney-Gr owth Tar gets % M + % + % V = % = % P + % + % Y = = + % + % Y Money gr owth + velocity gr owth = inflation r ate + output gr owth Money gr owth + velocity gr owth = inflation r ate + output gr owth Monetarists believe velocity is stable or at Monetarists believe velocity is stable or at least predictable- % CHANGE I N V I S least predictable- % CHANGE I N V I S CONSTANT OVER TI ME. CONSTANT OVER TI ME. % % M M = = T + % + % Y* Y* % % V V e T = inflation target = inflation target % Y* = Y* = growth rate of potential output growth rate of potential output % V e e = expected growth rate of velocity = expected growth rate of velocity I nstability of M oney-Gr owth Rule I nstability of M oney-Gr owth Rule...
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This note was uploaded on 03/23/2011 for the course ECONOMICS 220 taught by Professor Clare during the Spring '08 term at Rutgers.

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Lesson+8--Money+and+the+Economy - Lesson 8: Money and the...

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