Chapter 14 Monetary Policy

Chapter 14 Monetary Policy - Modern macroeconomics Monetary...

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Modern macroeconomics Monetary policy Chapters 14
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Monetary policy Initially, monetary policy was considered ineffective—like “pushing on a string,” since banks and the nonbank public have a propensity to hold money and not spend it. Now, it is considered very effective due mainly to the work of Milton Friedman, a Monetarists (Chicago School…)
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Monetarists-Chicago School Milton Friedman’s work [1950s] gave credibility that restrictive monetary policy was largely responsible for the Great Depression Tied GDP (=PY) to quantity of money (M) Recessions result from “too little money” (1930s) Inflation results from “too much money” (1970s)
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Quantity Theory of Money Equation of Exchange: MV ≡ PY (money vs real) M = money supply (quantity) V = money velocity (turnover rate) P = price level (average price, index) Y = real GDP/output (transactions) [PY = nominal GDP] THEORY: Changes in M cause proportional changes in P ( effect )— assuming V and Y stable.
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This note was uploaded on 04/01/2012 for the course ECON 101 taught by Professor Balaban during the Fall '07 term at UNC.

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Chapter 14 Monetary Policy - Modern macroeconomics Monetary...

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