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Unformatted text preview: 1 Money and Banking N. Sheflin Assignment 4 NOTES We continue with Monetary Theory the theory of how the quantity of money affects the macro economy. The Demand for Money determines which variables matter and the Transmission of Monetary Policy focuses on several mechanisms by which changes in the quantity of money affect economic activity. Register your clicker on iclicker.com using your netid (ex; SMITH) (NOT your student number ex: 123006789). If not sure if you did it, do it again. If you are using iClickers in another class and have registered with student number, no problem, register it again with netid it will keep both and use whichever is appropriate for the course. Your clicker points in Sakai WILL NOT be automatically updated they will not change until I do a manual update every week or two. Investment Game Rounds 0 and 1 read, register, buy something, get rich READING Croushore is (in my opinion) useless on this topic, so see the following web readings and my notes below. The demand for money http://en.wikipedia.org/wiki/Money_demand The classical quantity theory: http://en.wikipedia.org/wiki/Quantity_theory_of_money and then 20.2 (chapter 20, section Keynes Liquidity preference (ignore the venture capital section): http://en.wikipedia.org/wiki/Liquidity_preference The Liquidity Trap http://en.wikipedia.org/wiki/Liquidity_trap And monetarism http://en.wikipedia.org/wiki/Monetarism Dont worry about references to the Fed and/or money creation well come to those later. KEY POINTS Why care about the demand for money? o If markets force Md=Ms (the demand for money to equal the supply of money) then changes in Ms require changes in Md which require (cause) changes in the factors that explain the demand for money Classical Quantity Theory Md=f(P) hence changes in Ms change P only Keynesian Md=f(i,Y) hence changes in Ms change i, Y (i=interest rate) Classical Quantity Theory of Money M x V=P x y V=velocity=Py/M (tautology) o If velocity is fixed/ predictable M->PxY i.e. nominal GDP If velocity is fixed/ predictable M->PxY i....
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- Fall '10