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Unformatted text preview: Lecture 2 Theoretical Schools Readings: • Handa (2009)-Chapter 1 • Snowdon and Vane (2005)-Chapter 1 • Bain and Howells (2009)-Chapter 1 Section 2.1 Is Money Important? Can Money Affect Output? Different schools of economic thought have very different opinions about the ability for monetary policy to impact income and other variables. It is even debatable whether or not the monetary authorities are able to impact broader monetary aggregates in many circumstances. In particular, it is uncertain what ability the central bank has in managing crisis situations. Section 2.1.1 Classical Classical Dichotomy: Real and Nominal variables can be studied separately • Nominal and Real Variables • “Money as a Veil” or “Money is Neutral” meaning that money supply only impacts nominal prices. • Say’s law. • Walrasian theory of “General Equilibrium”-actions of rational optimizing agents ensure that all markets including labor market are cleared by flexible prices (Snowdon and Vane, 2005, p. 21). • Early Quantity Theory of Money. 1 Section 2.1.2 Keynesian Keynesian: True Keynes hard to define • Keynesian principles of AD management held even with flexible prices. • New-Keynesian & Neoclassical theory based on sticky prices. • Market failure and involuntary unemployment. • The idea of suboptimal equilibria. • Three motives for holding money. – Transactions (related to current consumption). – Precautionary (related to current consumption)....
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This note was uploaded on 05/22/2011 for the course ECON 430 taught by Professor Neveu during the Spring '11 term at James Madison University.
- Spring '11