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UNT / Economics / ECON 1110 / What is the equation of exchange?

What is the equation of exchange?

What is the equation of exchange?

Description

School: University of North Texas
Department: Economics
Course: Principles of Macroeconomics
Professor: Harry ellis
Term: Spring 2016
Tags: Macroeconomics, MonetaryTheory, and fiscal policy
Cost: 25
Name: Chapter 12: Monetary Theory
Description: These notes cover the very last chapter of the Macroeconomic course. Once again, the lecture notes from class are in black, and the added notes from the workbook that go more in depth are in blue pen.
Uploaded: 04/25/2016
5 Pages 140 Views 0 Unlocks
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"}ol.lst-kix_9fbrq0dwj3gb-5{list-style-type:none}ol.lst-kix_9fbrq0dwj3gb-4{list-style-type:none}ol.lst-kix_9fbrq0dwj3gb-7{list-style-type:none}ol.lst-kix_9fbrq0dwj3gb-6{list-style-type:none}ol.lst-kix_savor42fj7on-3.start{counter-reset:lst-ctn-kix_savor42fj7on-3 0}ol.lst-kix_9fbrq0dwj3gb-8{list-style-type:none}.lst-kix_1lphzby9sfow-7 > li:before{content:"○ "}.lst-kix_1lphzby9sfow-8 > li:before{content:"■ "}.lst-kix_9fbrq0dwj3gb-1 > li:before{content:"" counter(lst-ctn-kix_9fbrq0dwj3gb-1,lower-latin) ". "}.lst-kix_9fbrq0dwj3gb-5 > li:before{content:"" counter(lst-ctn-kix_9fbrq0dwj3gb-5,lower-roman) ". "}.lst-kix_1lphzby9sfow-3 > li:before{content:"● "}.lst-kix_1lphzby9sfow-4 > li:before{content:"○ "}.lst-kix_jl11n53k716b-0 > li{counter-increment:lst-ctn-kix_jl11n53k716b-0}.lst-kix_9fbrq0dwj3gb-4 > li:before{content:"" counter(lst-ctn-kix_9fbrq0dwj3gb-4,lower-latin) ". "}ol.lst-kix_6zxwsxht18m1-8{list-style-type:none}.lst-kix_6zxwsxht18m1-8 > li:before{content:"" counter(lst-ctn-kix_6zxwsxht18m1-8,lower-roman) ". "}ol.lst-kix_6zxwsxht18m1-0.start{counter-reset:lst-ctn-kix_6zxwsxht18m1-0 0}.lst-kix_mwe78gjs772v-6 > li{counter-increment:lst-ctn-kix_mwe78gjs772v-6}.lst-kix_savor42fj7on-6 > li{counter-increment:lst-ctn-kix_savor42fj7on-6}.lst-kix_9fbrq0dwj3gb-8 > li:before{content:"" counter(lst-ctn-kix_9fbrq0dwj3gb-8,lower-roman) ". "}ol.lst-kix_bwhj3jm4nz9n-8.start{counter-reset:lst-ctn-kix_bwhj3jm4nz9n-8 0}.lst-kix_jl11n53k716b-4 > li{counter-increment:lst-ctn-kix_jl11n53k716b-4}.lst-kix_6zxwsxht18m1-0 > li:before{content:"" counter(lst-ctn-kix_6zxwsxht18m1-0,upper-latin) ") "}ol.lst-kix_savor42fj7on-2.start{counter-reset:lst-ctn-kix_savor42fj7on-2 0}.lst-kix_bwhj3jm4nz9n-8 > li:before{content:"" counter(lst-ctn-kix_bwhj3jm4nz9n-8,lower-roman) ". 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"}.lst-kix_1lgpl4j9e0zi-1 > li{counter-increment:lst-ctn-kix_1lgpl4j9e0zi-1}.lst-kix_6zxwsxht18m1-1 > li:before{content:"" counter(lst-ctn-kix_6zxwsxht18m1-1,lower-latin) ") "}ol.lst-kix_bwhj3jm4nz9n-2.start{counter-reset:lst-ctn-kix_bwhj3jm4nz9n-2 0}ol.lst-kix_jl11n53k716b-1.start{counter-reset:lst-ctn-kix_jl11n53k716b-1 0}ol.lst-kix_savor42fj7on-1.start{counter-reset:lst-ctn-kix_savor42fj7on-1 0}.lst-kix_kf4xdfr244pl-7 > li:before{content:"- "}.lst-kix_26kia1t0e4fi-5 > li{counter-increment:lst-ctn-kix_26kia1t0e4fi-5}.lst-kix_jl11n53k716b-6 > li:before{content:"" counter(lst-ctn-kix_jl11n53k716b-6,decimal) ". 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Chapter 12: Monetary TheoryWe also discuss several other topics like differentiated oligopoly exists where a small number of firms are

If you want to learn more check out What does curve fitting mean?

I. MS 一 Impact on the Price Level

  1. Equation of Exchange: gives the relationship between the MS and the # of times per year MS must “turn over” to purchase all of GDP

Equation of Exchange → M・V=P・QIf you want to learn more check out Describe the characteristics of loneliness.

        M - Money Supply                Q - Real GDP

        P - Price Level                        V - Velocity of Money

  1. Velocity (V): the average # of times money is spent purchasing final goods and services
  • How many times a dollar is spent; how many times it circulates the economy

        

  1. Quantity Theory of Money (classical) long-term view
  1. Make two assumptions regarding the equation of exchange
  1. V is constant in the long run
  • Assume velocity is stable because it is determined by institutional forces that tend to change slowly over time
  1. Q is constant in the long run
  • Monetaries assume that real GDP is determined by supply-side factors
  • So ,

Ex: IF ↑ M by 4% → ↑ by P 4% too

  1. There is a positive (direct) and proportional(rational 1:1) relationship between MS and PL

Ex: IF ↑ MS by 3% →  P will ↑ by 3% too, and vice versaIf you want to learn more check out math 1420

II. Monetarism 一 Nobel prize economist Milton Friedman

  1. Characteristics
  1. Monetary rule: Fed should allow MS to grow at a steady rate, consistent with growth in real GDP
  • Policy makers should set money growth rate equal to the (expected) % change in real GDP if they want to keep the inflation rate low
  • Right now it’s 3-4% a year
  1. ↑ MS excessively causes inflation in the long run with no change in real GDP

↑ MS → ↑ AD → ↑ PL, which causes inflation in the long runWe also discuss several other topics like protagerous

                                                Notice how real GDP is still the same and If you want to learn more check out Why is multiculturalism important?

hasn’t changed

III. Keynesian Transmission Mechanism

  • MS is fixed; MD has a (一) relationship
  • Any time ↑ spending → ↑ AD

  1. Expansionary Monetary Policy (↑ MS)

(use if you are worried by recession)                

         ↓ r                                        ⎫        Do these to ↑ MS

 ↓ discounts /  ↓ fed funds rate        ⎬

buy bonds                                ⎭

↑ MS → ↓ interest rate → ↑ investment → ↑ AD

  1. Contractionary Monetary Policy (↓ MS)

(use if you are worried about inflation)

         ↑ r                                        ⎫        Do these to ↓ MS

 ↑ discounts /  ↑ fed funds rate        ⎬

buy bonds                                ⎭

↓ MS → ↑ interest rate → ↓ investment → ↓ AD

Real GDP will change by more because of the spendinding multiple

  1. Monetary Policy Constraints
  1. Liquidity Trap:

The horizontal portion of the money demand curve

                                        

  • The economic theory that illustrates why investment spending may not increase even at law real rates of interest
  • If we are in a liquidity trap, and ↑ MS, then interes or AD do not change

Keynesian prefer not to use this (fiscal policy more effective than monetary to keynesian)

  1. Interest rate insensitivity to change in MS
  • Degree of sensitivity is very small; not so sensitive
  1. Investment insensitivity to changes in interest rates
  • These 3 reasons are why Keyneshians prefer fiscal policy over monetary policy, since monetary isn't so powerful
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