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Economics 201 Ch 12

Principles of Economics Ch 12

QuestionAnswer
Monetary Policy Changes in the money supply to achieve macroeconomic goals.
Velocity of Money (V) The average number of times that a dollar in spent annually.
Velocity of Money (V) = Nominal GDP / M (M = Money supply)
M x V = P x Q (P = Price level)(Q = Real GDP)
Monetarism An economic theory based on classical theory, but with some differences from classical monetary theory.
Monetarism holds that velocity is: Not constant, but changes in predictable ways.
Monetarism holds that changes in the money supply and/or in velocity can: Change AD.
Monetarism holds that changes in AD will: Change both price level and Real GDP.
What are the steps in the Keynesian monetary transmission mechanism? An increase in the money supply leads to a decrease in interest rates, which leads to an increase in investment, which leads to an increase in Total Expenditures, which leads to an increase in Real GDP.
What are the reasons why the Keynesian monetary transmission mechanism will fail? Investment may be interest-insensitive and The liquidity trap.
The Liquidity Trap An increase in money supply does not cause a decrease in inerest rates.
The Monetarist Transmission Mechanism An increase in the money supply means increased Total Expenditures and Real GDP. A decrease in the money supply means a decreased Total Expenditures and Real GDP.
Contractionary Monetary Policy When the economy is in an inflation gap, Real GDP is greater then Natural Real GDP. To close an inflationary gap, the money supply would be decreased.
Exansionary Monetary Policy When the economy is in a recessionary gap, Real GDP is less then Natural Real GDP. To close a recessionary gap, the money supply would be increased.
A Monetary Rule would: Link money supply growth to Real GDP growth to achieve a stable price level.
Created by: dengler
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