Lesson+7--Money+and+the+Economy

Lesson+7--Money+and+the+Economy - Lesson 7: Money and the...

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Lesson 7: Money and the Economy Section on Money-Growth Rules (p392-394) Milton and Money Stock Control, William Poole (FRBSL July 30, 2007) http://fraser.stlouisfed.org/historicaldocs /1103/download/40915/20070731.pdf
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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
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Helicopter Ben…What is this about?
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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 the focuses only on the growth rate of money in the long run, growth rate of money in the long run, ignoring short-run fluctuations ignoring short-run fluctuations Example Example : money growth = 3% every year : money growth = 3% every year Such a rule is based on the equation of Such a rule is based on the equation of exchange exchange
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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 be idea that the money in circulation must be used a certain number of times to support used a certain number of times to support a given amount of spending a given amount of spending M M × × V = P V = P × × Y Y Velocity Velocity = number of times the average = number of times the average dollar is spent on final goods and services dollar is spent on final goods and 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 least Monetarists believe velocity is stable or at least predictable predictable % % Δ Δ M M = = π π T + % + % Δ Δ Y* − Y* − % % Δ Δ V V e π π T = inflation target = inflation target % % Δ Δ Y* = Y* = growth rate of potential output growth rate of potential output % % Δ Δ V V e e = expected growth rate of velocity = expected growth rate of velocity
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Instability of Money-Growth Rule Financial innovations sometimes alter the Financial innovations sometimes alter the relationship between money and other relationship between money and other variables, such as the introduction of variables, such as the introduction of interest-bearing checking accounts interest-bearing checking accounts As a result, velocity became unstable in As a result, velocity became unstable in the 1980s and 1990s. the 1980s and 1990s.
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Lesson+7--Money+and+the+Economy - Lesson 7: Money and the...

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