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

Lesson+8--Money+and+the+Economy - L esson 8 M oney and t he...

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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
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Any Idea Why M1 surged in the fall of 2008?
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M2 surged in the aftermath of the Lehman bankruptcy— Why?
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Money Supply Growth and The Business Cycle. M1- PRIMARY TARGET OF THE FED
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Helicopter Ben…What 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 didn’t increase m spending more would increase the prices and increase the inflation. People were making fun of Bernanke back then.
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Money-Growth Rules Money-Growth 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 growth rule money growth rule 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 Such a rule is based on the equation of
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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 ( NominaL GDP= P*Y) Y ( NominaL 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
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Money-Growth Targets Money-Growth Targets % M + % + V = % = P + % + % Y = = π π + % Y Money growth + velocity growth = inflation rate + output growth Money growth + velocity growth = inflation rate + output growth Monetarists believe velocity is stable or at Monetarists believe velocity is stable or at least predictable- % CHANGE IN V IS least predictable- % CHANGE IN V IS CONSTANT OVER TIME. CONSTANT OVER TIME. % % Δ Δ M M = = π π T + % + % Δ Δ Y* Y* % % Δ Δ V V e π T = inflation target = inflation target % Δ Y* = Y* = growth rate of potential output growth rate of potential output % Δ V e e = expected growth rate of velocity = expected growth rate of velocity
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I nstability of Money-Growth Rule I nstability of Money-Growth Rule Financial innovations sometimes alter Financial innovations sometimes alter the relationship between money and the relationship between money and
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