MDVELTRANSCLASS - 1 Md & Transmission of Monetary...

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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 Cant 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 Dont read-study Dont 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 Says 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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This note was uploaded on 02/29/2012 for the course ECONOMICS 220:301 taught by Professor Sheflin during the Fall '09 term at Rutgers.

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MDVELTRANSCLASS - 1 Md & Transmission of Monetary...

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