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Unformatted text preview: and Friedman’s Model (cont’d) The demand for money is stable ⇒ velocity is predictable • Md / P = f( Y P ) ; V = Y / f( Y P ) • In a business cycle expansion, much of the increase in income will be transitory, permanent income (Yp) rises much less than income (Y). • As a result, Y rises by more than f(Yp) and V increases. • The opposite happens in a business cycle contraction Y falls by more than f(Yp). • Therefore V is procyclical – rises in a business cycle expansion and falls in a business cycle contraction. • Money is the primary determinant of aggregate spending...
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This note was uploaded on 11/23/2011 for the course FIN 243 taught by Professor Jw during the Spring '11 term at Hong Kong Shue Yan.
- Spring '11