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LectureNote15 - LECTURE FIFTEEN Three Theories of the...

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LECTURE FIFTEEN Three Theories of the Demand for Money and Empirical Evidence ECONOMICS 209 Professor Kevin Huang Vanderbilt University
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19-1 The Demand for Money We have studied the determination of the supply of money and the role of the FED We now analyze the determination of the demand for money Three theories of the demand for money ± Fisher’s Classic Quantity Theory ± Keynes’s Liquidity Preference Theory ± Friedman’s Modern Quantity Theory
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19-2 Two Determinants of the Demand for Money Income—importance universally agreed Interest Rates—importance controversial
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19-3 M = the money supply P = price level Y = aggregate output (income) P × Y = aggregate nominal income (nominal GDP) V= velocity of money (average number of times per year that a dollar is spent) V = P × Y M Equation of Exchange M × V = P × Y Velocity of Money and Equation of Exchange
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19-4 How to Turn the Identity into a Theory The equation of exchange is an identity To turn this identity into a theory of the demand for money, the key is the behavior of the velocity of money To a large extent, differences between theories of the velocity of money determine differences between theories of the demand for money
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19-5 Fisher’s Classic Quantity Theory Velocity of money is determined by institutional factors that change only slowly; so velocity is constant in SR Nominal income is determined solely by movements in the quantity of money
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This note was uploaded on 04/07/2008 for the course ECON 209 taught by Professor Professor during the Spring '08 term at Vanderbilt.

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LectureNote15 - LECTURE FIFTEEN Three Theories of the...

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