3323ch24-25

3323ch24-25 - Chapter 24 The Keynesian Framework Chapter 25...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 24 The Keynesian Framework Chapter 25 The IS-LM World Keynesian Theory Advocates active role of the federal government in correcting economic problems Manipulate money supply to adjust interest rates to induce borrowing or decrease borrowing Looks at the short-run--sees immediate problem, fix it now, rather than let it fix itself Liquidity Preference Theory - Market rate of interest is determined by demand/supply of money balances. Demand of Money + Transaction f(y) Precautionary - Speculative f(r) Since: If MS increases then either income increases or interest rates drop. Supply of Money Fed basically determines supply Few uncontrollable factors (1) banks lending (2) public's preference for cash Letting D=S then solve for interest rate: Liquidity Trap: At some point rates will not drop further. At this point no one would trade money for bonds. ) , M , ( f = r P Y e + - + ) , ( - + = r Y f D m
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Keynesian Focus Focus on aggregate spending as the variable that must be adjusted through adjusting interest rates: ie. Excessive inflation--Keynesians see it as excessive spending (demand-pull inflation) so they would manipulate money supply to raise interest rates to decrease spending Focus on ensuring low unemployment Keynesians vs Monetarists Break with Quantity Theory (Monetarists): 1. Since interest rates change when MS change, the rigid proportional link between money and income is broken. 2. If the demand for money depends on interest rates, then velocity is a function of interest rates which implies income no longer proportional to change in money supply. Reaction to Recession:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/09/2011 for the course FIN 3233 taught by Professor Frohlich during the Spring '11 term at UNF.

Page1 / 8

3323ch24-25 - Chapter 24 The Keynesian Framework Chapter 25...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online