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MDVELTRANSCLASS - 1 Md& Transmission of Monetary Policy...

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Unformatted text preview: 1 Md & Transmission of Monetary Policy ¡ Quantity Theory of Money – LR ¡ Keynesian Demand for Money ¡ Monetarist – 1 Friedman ¡ Transmission ‘Channels’ ¡ Liquidity Trap and Quantitative easing 36 Money - Quantitative easing Does Money Matter (to the Economy)? ¡ Classical View No - Ms->P only ¢ classical dichotomy=neutrality of money ¡ Early Keynesians – yes and no ¢ ‘normal’ economy yes Ms&Md->i->I->D->y,p ¢ Recession/depression - no ¡ liquidity trap/ interest elasticity of Investment ¡ Can’t push on a string 2 ¡ Can t push on a string ¡ Monetarists – yes primarily only Ms matters ¢ SR Ms->p,y LR Ms->P ¢ multiple channels ¢ “Monetarist – Fiscalist’ Debates ¡ Modern View - yes ¢ Multiple Channels in Short run – y, P: Long run – P: In the News 3 2 Course Issues ¡ Register iClicker with NETID NOW!! ¡ ODE 2/10 first meeting Nielsen ¢ econweb.rutgers.edu/sheflin/ode.htm ¢ Engineer/mba ba econ/mba ba econ/math 4 econ/math ¡ Don’t read-study ¡ Don’t listen-learn ¡ Investment Game 1 below The Quantity Theory of Money ¢ Equation of Exchange M x V = P x Y ¡ Velocity V=PxY/M ¢ Quantity Theory of Money ¡ V constant – institutional factors ¢ Y ‘fixed’ ¢ P determined by M 5 ¢ M -> P ¡ With y ‘fixed’ due to Say’s law ¡ Proportional changes ¢ Velocity – link between M and Py ¡ If stable/predictable/constant M->P in LR and P and/or y in SR Application- Is Velocity Constant? 6 3 Keynesian Liquidity Preference Theory ¡ Md=f(i,y)xP i’<0, y’>0 ¢ Or= Md/Pf(i,y) Real Money Balances ¡ Transactions and precautionary demand Md=f(y)xP ¢ Speculative demand- Money versus bonds ¡ Int rate ‘high’, expect it to fall, expect 7 bond prices to rise, hence buy bonds today ¡ Int rate low, the opposite ¡ Or opportunity cost of holding money ¢ Velocity V=(PxY)/M= Y/f(i,y) ¡ Hence velocity is not stable, but fluctuates with int rate and y ¡ Pro-cyclical - y up ->i up Md down V up Keynesian Md&Ms S 1 Interest Rate...
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MDVELTRANSCLASS - 1 Md& Transmission of Monetary Policy...

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