The higher the economy's price level, the greater the demand for money · The quantity of money demanded varies inversely with the interest rate. (low/high interest rate) · The supply of money is determined in the end by- The FED · Monetary policy influences the market interest rate, which in turn affects the level of planned investment, a component of aggregated demand · To increase the money supply, the FED uses open-market purchases of US government securities as its primary tool Money supply- increases, interest rate- reduces, investment- stimulated, aggregated demand- increase, real GDP- increase ( PowerPoint · The FED could wait to see if the economy recoups on its own · Recognition of nominal wages could take place. (Lower production costs push the supply curve rightward, closing the contractionary gap · The FED could also lower the interest rate Equation of exchange The quantity of money, multiplied by its velocity, V equals nominal GDP, which is the product of the price level, P, and real GDP, Y
equation of exchange the quantity of M, multiplied by' its velocity, V equals nominal GDP, which is the product of the price level, P, and real GDP, Y Velocity of Money- The average number of times per year each dollar is used to purchase final goods and services. Velocity only measures spending on final goods and services. (Given the GDP and the money supply, each dollar must have been spent 8.5 times on average to pay for final goods and services). velocity of money the average number of times per year each dollar is used to purchase final goods and services Money Illusions Confusion of the real and nominal wages (people thinking they would get more of a raise if inflation didn’t exists Expectations of Inflation The beliefs held by the public about the likely path of inflation for the future Adaptive Expectations The theory that the public will form expectations of the future inflation based on the inflation of the past (up to 1970's) Expectations Phillips Curve Shows the relationship between inflation and unemployment, taking into account expectations of inflation (equation showing that when inflation is high, unemployment is low) Rational Expectations The theory that the public will form expectations of future inflation based on all information currently available to them (news reports, FED announcements, etc) Monetary Policy Credibility Opinions that the public has about its central bank and its leaders specifically that influences their rational expectations is the FED following its obligation to low and stable inflation?)
Cost of Unemployment Costs to society when the unemployment rate is higher than the natural rate of unemployment (actual output is less than potential output, inefficient use of resources, unemployment insurance. Monetarists- Economists who believe that the money supply has a more substantial impact on short- term productivity than other factors. [Milton Freidman, Philip Cagan] Keynesians Economists who believe that employment levels and aggregate demand have a more substantial impact on short-term productivity than other factors. [John Maynard Keynes]
You've reached the end of your free preview.
Want to read all 34 pages?