Expansionary and contractionary monetary policy

Expansionary and contractionary monetary policy -...

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Expansionary and contractionary monetary policy.  The Fed is engaging in  expansionary  monetary policy  when it uses any of its instruments of monetary policy in such a way as to cause  an increase in the supply of money. The Fed is said to engage in  contractionary monetary policy  when it uses its instruments to effect a reduction in the supply of money.  Classical view of  monetary policy.  The classical economists' view of monetary policy is based on the  quantity theory  of money . According to this theory, an increase (decrease) in the quantity of money leads to a  proportional increase (decrease) in the price level. The quantity theory of money is usually discussed  in terms of the  equation of exchange , which is given by the expression  In this expression,  P  denotes the price level, and  Y  denotes the level of current real GDP. Hence, 
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This note was uploaded on 11/19/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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