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Unformatted text preview: 9.1 Monetarist Propositions 1. The supply of money is the dominant influence on nominal income 2. In the long run, the influence of money is primarily on the price level and other Nominal magnitudes. In the long run, real variables, such as output and employment, are determined by real, not monetary, factors. 3. In the short run, the supply of money does influence real variables. Money is the dominant factor causing cyclical movements in output and employment. 3.i. When quantity of money changes, in the short run prices are do not make the full adjustment. 4. The private sector is inherently stable. Instability in the economy is primarily the result of government policies. 4.i. Instability is caused by the government by the allowance of instability in the growth of the money supply. 9.2 The Reformulation of the QTM Contrary to the view of early Keynesians, Friedman argued that the demand for money was stable. Friedman believe that the interest elasticity of money demand was certainly not infinite, but rather small. (Vertical LM Curve) The quantity of money was the dominant influence on the level of economic activity. Money and Early Keynesians The velocity of money is systematically determined within the system. An increase in G will cause both the interest rate and equilibrium level of income to rise, but since the money supply is unchanged, the velocity of money would have increased. At the higher interest rate the speculative demand for money will have declined, and the demand for transactions balances at a given level of income will also have fallen. demand for transactions balances at a given level of income will also have fallen....
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This note was uploaded on 02/23/2012 for the course ECON 420 taught by Professor Hill during the Fall '08 term at UNC.
- Fall '08