Module 3: The monetarist rule Flashcards
monetarists claim that…
crowding-out forces are so strong that offset fiscal policies and are ineffective
quantity theory of money formula?
M*v = PQ (nominal GDP)
Money supply x velocity equals price level x quantity
velocity formula?
v = PQ / M
Nominal GDP / Money supply
what is the modern quantity theory of money?
the demand for money (if nominal GDP goes up, money demand goes up too)
modern quantity theory formula?
M = (1/v)*PQ
increase in money supply cuses …. in prices and output
-equal increase in prices (when full-employment
-equal increase in output (when below full-employment)
when income goes up and demand for money too, what happens to money supply?
excess cash reduces, slowing down the multiplier and the economy
Annual money supply is equal to….
∆ inflation + ∆real income or growth
∆inflation is equal to ….
∆money supply - ∆growth
monetarists rule says…
that the Ms should increase slow and steady despite of business cycle stage
seigniorage is …
amount of financing available to gov’t through printing
formula for seigniorage?
Ms * nominal growth (%)
rules vs discretion debate, differences?
discretionaries say
-velocity is unstable
-need to target int. rates not mon. agg.
-need to fight monetary collapses, etc
Monetarists say
-against fed and politicians
-control inflation
income with respect to money multiplier formula?
∆GDP \ ∆M
velocity increases when…
holding income is constant, money demand is down, so same holdings work harder for same spending
