Monetarism is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and price levels. It challenges Keynesian economics by arguing that monetary policy, not fiscal policy, should be used to stabilize the economy. Monetarists believe the central bank should target money supply growth and follow fixed rules, rather than have discretion, as monetary factors are more important than fiscal interventions in impacting economic outcomes.
Restatement of quantity theory of moneyNayan Vaghela
Milton Friedman proposed a restatement of the Quantity Theory of Money (QTM) that incorporated permanent real income and wealth. He argued that the demand for money depends on total wealth, expected returns on various assets, and tastes/preferences. Friedman defined permanent real income as the sustainable level of income without reducing wealth over time. His equation for the QTM included factors like the money stock, the price level, permanent income, expected rates of return on different assets, and other variables. While improving on prior theories, Friedman's restatement still had limitations like subjective terms that are hard to measure and challenges maintaining a steady money supply in a modern economy.
Tobin criticized Keynes' assumption that individuals only hold assets as bonds or cash. Instead, Tobin proposed that individuals hold a portfolio of various assets to strike a balance between risk and return. These portfolios include money, bonds, property, and other assets. According to Tobin, individuals prefer less risk and are uncertain about future interest rates. They therefore choose a combination of less risky but less productive safe assets and more risky but more productive assets. Tobin also showed that an individual's demand for money is inversely related to the interest rate, as higher rates make money less attractive compared to bonds.
This document outlines the Absolute Income Hypothesis theory presented by Keynes in 1936. The theory states that as absolute income increases, the proportion of that income spent on consumption decreases. So while consumption increases with more income, the rate of increase declines. Key points include consumption (C) increasing at a decreasing rate as income (Y) rises, the average propensity to consume (APC) decreasing as income rises, and the theory showing consumption-income relationships in both the short run and long run.
This document outlines the structural theory of inflation in less developed countries. It discusses how structural defects and bottlenecks exist in these economies that cause inflation, making the traditional quantity theory of money not applicable. Three main types of bottlenecks are described: agricultural bottlenecks due to issues like land ownership that limit food production growth; government resource constraints that force them to print money to fund infrastructure projects leading to inflation; and foreign exchange bottlenecks from low exports and high import payments causing currency devaluations and price increases. The structural theory argues these bottlenecks must be addressed through balanced investment instead of just monetary or demand-side policies to effectively reduce inflation in less developed economies.
The document discusses the consumption function, which models the relationship between total consumption and national income. Consumption is defined as an increasing function of income. The average propensity to consume (APC) is the ratio of consumption to income and declines as income rises. The marginal propensity to consume (MPC) is the change in consumption from a change in income and is assumed to be positive but less than 1. Keynes' psychological law of consumption states that consumption increases less than proportionately to increases in income. Determinants of consumption include subjective psychological factors as well as objective factors like wages, fiscal policy, and interest rates. Theories like Duesenberry's relative income hypothesis model consumption as interdependent and influenced by social
Adam Smith is considered the Father of Economics. In his seminal book, The Wealth of Nations, he argued that a country's wealth comes from the total value of goods and services produced, not just gold or agriculture. Smith identified two key drivers of economic growth: the division of labor and capital accumulation. The division of labor leads to specialization and higher productivity, while capital accumulation raises productivity by increasing capital per worker. This starts a virtuous cycle of growth, but eventually diminishing returns set in and growth slows, reaching a stationary state.
The Baumol model describes money demand as a tradeoff between liquidity and interest rate returns. It assumes consumers can keep income as cash or in savings accounts. Cash earns no interest while savings accounts pay interest i, the opportunity cost of holding cash. Consumers minimize costs by choosing the optimal number of trips N to the bank to withdraw cash. Their average money holdings is Y/2N. The Baumol-Tobin money demand function shows real money demand depends positively on income and withdrawal costs, and negatively on the interest rate.
The Liquidity Preference Theory suggests that investors demand higher interest rates for longer term investments because cash is considered the most liquid asset. There are three motives for demanding money: transaction motives for daily needs, precautionary motives for unexpected events, and speculative motives based on interest rate fluctuations. The total demand for money is the sum of these three motives and is determined by income and interest rates. Interest rates are set by the point where the total demand for money equals the fixed money supply as determined by the central bank, with the demand curve sloping downward and the supply curve being vertical.
Keynesian theory of money proposes that the relationship between the quantity of money and prices is indirect and non-proportional, unlike quantity theorists. Key provisions include that the economy is unstable and the state should use tools like monetary policy; a change in the money supply causes interest rate changes which lead to changes in investment demand and nominal GDP; and Keynes identified three macroeconomic policies - monetary, fiscal, and incomes policy - that affect GDP. Specifically, monetary policy aims to decrease interest rates to boost investment via money supply increases, while fiscal policy directly increases public investment when private investment is insufficient.
Don Patinkin criticized the neoclassical assumptions of homogeneity and dichotomization. He proposed the real balance effect to reconcile goods and money markets. The real balance effect posits that changes in the price level affect real purchasing power, which impacts demand for goods. When prices rise, real balances and goods demand fall, pushing prices back down. This feedback loop between prices, real balances, and goods demand is represented using the IS-LM model, where a fall in prices shifts the LM curve right, raising output and employment until full employment is reached. Patinkin argues this real balance effect denies the homogeneity assumption and integrates goods and money markets.
Keynes’s psychological law of consumptionAjay Samyal
1) Keynes proposed a psychological law of consumption which states that as income increases, consumption increases but not proportionately. The marginal propensity to consume is less than one.
2) Consumption depends mainly on current income. As income rises, the proportion of income spent on consumption (average propensity to consume) falls.
3) Keynes' consumption function can be expressed as C = a + bYd, where C is consumption, Yd is disposable income, a is autonomous consumption, and b is the marginal propensity to consume (MPC), which is less than the average propensity to consume (APC).
Permanent income hypothesis states that consumption is based on permanent income rather than current income. Permanent income refers to income that is expected to persist in the future, while transitory income does not persist. According to the hypothesis, people smooth consumption in response to transitory income variations by using savings and borrowing. The hypothesis assumes tastes and interest rates remain stable over time. In the short run, the consumption function shows consumption is less proportional to income than in the long run, where proportionality is achieved through savings adjustments. Critics argue the hypothesis ignores differences in preferences between rich and poor and does not account for effects of windfalls on consumption.
The Harrod-Domar model of economic growth extends Keynesian analysis to the long run by considering the dual effects of investment on aggregate demand and productive capacity. It seeks to determine the unique growth rate of investment and income needed to maintain full employment. The Domar version presents a fundamental growth equation showing that the increase in national income depends on the increase in capital stock multiplied by the marginal output-capital ratio. Harrod's model treats growth more dynamically, with the warranted growth rate determined by the population growth rate, output per capita based on investment level, and capital accumulation. Equilibrium is achieved when the actual incremental capital-output ratio equals the required ratio warranted by technology.
The document summarizes the quantity theory of money and the Cambridge cash-balance approach. The quantity theory states that changes in the money supply will directly impact the price level, as long as other factors remain constant. It presents Fisher's equation of exchange and assumptions of the theory. The Cambridge approach focuses on the demand for money determining prices, and presents equations from Marshall, Pigou, Robertson, and Keynes relating money supply, income, and demand for cash balances to price levels. Criticisms of both theories are outlined.
The accelerator theory states that an increase in demand for consumer goods will lead to an increase in demand for capital goods used to produce those consumer goods. It explains the relationship between consumer goods industries and capital goods industries. The accelerator coefficient is the ratio of change in investment to change in consumption or output. The accelerator theory was introduced by T.N. Carver in 1903 and further developed by economists like Harrod, Solow, Samuelson and Hicks to explain business cycles. It assumes a constant capital-output ratio and elastic supply of credit and resources so investment can adjust to changes in demand.
Permanent and Life Cycle Income HypothesisJosephAsafo1
The document discusses the Permanent Income Hypothesis (PIH) and Life Cycle Hypothesis (LCH). It explains that according to PIH, consumption is based on permanent income rather than current income. Current income has both permanent and transitory components. The LCH suggests that consumption varies over a person's life cycle as they save when young and spend when retired to maintain smooth consumption levels. The LCH consumption function shows consumption depends on both wealth and income levels over a person's lifetime.
The document discusses two theories of consumption:
1. Permanent Income Hypothesis by Milton Friedman which argues that consumers base their consumption on their permanent income rather than temporary fluctuations in income. Consumption remains constant even if temporary income changes in the short run.
2. Life Cycle Hypothesis by Modigliani which proposes that long-term consumption is related to lifetime average income and depends on factors like wealth, future earnings, age, and rate of return on capital. It suggests consumption and savings patterns vary at different stages of life and are influenced by the age distribution of the population.
INDIRECT UTILITY FUNCTION AND ROY’S IDENTITIY by Maryam LoneSAMEENALONE2
- Utility is a measure of satisfaction derived from consuming goods and services. Individuals seek to maximize their utility subject to a budget constraint.
- Indifference curves represent combinations of goods that provide equal utility. The slope of the indifference curve is the marginal rate of substitution (MRS).
- The budget constraint shows affordable combinations given prices and income. Utility is maximized at the point where the MRS equals the price ratio, where the indifference curve is tangent to the budget constraint.
- Using tools like Lagrangian optimization and the envelope theorem, the amounts demanded of each good can be derived as functions of prices and income.
The document compares the monetary and Keynesian approaches to economic stability. The monetary (or monetarist) approach is based on the role of money in stabilizing aggregate demand, and believes that limiting government intervention and controlling the money supply are key. The Keynesian approach focuses on the role of government spending in stabilizing aggregate demand, and does not restrict government intervention. It believes fiscal policy tools like tax rates and government spending are most important for achieving economic stability, especially during downturns when suggested solutions include increasing various types of spending.
The document discusses different macroeconomic theories including:
- Classical economists believed in full employment and laissez-faire markets.
- Keynesians believe active government policy is needed to stabilize the economy due to unstable aggregate demand and downwardly inflexible prices and wages.
- Monetarists like Milton Friedman advocated for a monetary rule where the money supply increases 3-5% annually. They believe velocity is stable.
- New Keynesians see the economy as potentially unstable due to changes in investment and supply shocks. They support monetary policy targeting interest rates in the short-run and money supply in the long-run.
This document provides a prospectus for Sabhal Mòr Ostaig, the National Centre for Gaelic Language and Culture located on the Isle of Skye in Scotland. It outlines the college's role as part of the University of the Highlands and Islands and as the only institution that provides higher education through the medium of Gaelic. The prospectus describes the college's excellent learning facilities and resources, as well as its strong ties to the local Gaelic community through partnerships with local schools and community organizations. It highlights the many cultural, artistic, and recreational opportunities available on campus and around the Isle of Skye for students to immerse themselves in Gaelic language and culture.
This document compares the Chicago School and Austrian School of economic thought. It discusses their differing views on monetary policy and business cycles. The Chicago School believes monetary policy can effectively target growth rates, while Austrians are skeptical of central bank discretion and blame booms and busts on unsustainable credit expansion. Both schools opposed irresponsible monetary expansion but differed on whether contractionary policies could worsen downturns. While the Chicago School has been more influential academically and politically, Austrians may offer a more accurate framework for understanding economic fluctuations.
Before 1997, interest rates in the UK were decided by the government and were sometimes used for political rather than economic reasons. In 1997, New Labour gave control over monetary policy to the independent Bank of England, with the Monetary Policy Committee setting interest rates to meet an inflation target. The MPC considers factors like financial markets, the international economy, money and credit conditions, demand and output, the labor market, and costs and prices when deciding interest rates.
Keynesian economics originated as a response to the inherent instability of capitalism and lack of full employment. It argues the government should stimulate the economy through public works spending and deficit spending, as private spending alone does not guarantee full employment. While Keynesian policies were used during the New Deal and World War II to stimulate the US economy, later attempts to use monetary policy alone in Britain caused a deep recession, demonstrating Keynesian policies must be carefully implemented to avoid negative consequences.
economics schools of thoughts and history of economics thoughts,, different e...abdur rahman
This document discusses three major schools of macroeconomic thought: Keynesian economics, monetarism, and new classical economics. Keynesian economics advocates for active government intervention, while monetarism and new classical economics are skeptical of intervention. Monetarism emphasizes that money matters and that inflation is purely a monetary phenomenon caused by increases in the money supply. New classical economics argues that traditional macro models assume expectations are formed naively. A debate continues between Keynesians, who support coordinated monetary and fiscal policy, and monetarists, who prefer a steady, non-interventionist approach to money growth.
Monetary and fiscal policy notes and debat directionsMr.J
This document discusses different economic theories and policies, including:
1. Classical economics believes that markets will naturally correct themselves through adjustments in supply and demand without government intervention. Keynesian economics holds that economies are unstable and governments must take action through fiscal and monetary policy to correct imbalances.
2. Fiscal policy refers to how governments tax and spend, with Keynesians advocating for deficit spending during recessions to boost demand. Supply-siders believe tax cuts can spur growth by putting more money in private hands.
3. Monetary policy involves how central banks like the Federal Reserve regulate money supply by adjusting interest rates and reserves, aiming to control inflation. Tighter monetary policy reduces money supply to lower
This document discusses monetary theory and the relationship between money supply and economic activity. It covers key topics such as:
1) How changes in money supply can affect total output and price levels in the economy. An increase in money supply when the economy is not at full employment will lead to increases in output more than prices, while at full employment it will lead to price increases more than output.
2) The components of bank reserves including actual reserves, required reserves, and excess reserves which forms the basis for commercial banks' lending and money creation.
3) How the money multiplier effect works to amplify the impact of changes in excess reserves on the overall money supply through the banking system.
The document provides an overview of monetarism and Milton Friedman's restatement of the quantity theory of money. It discusses four key aspects of monetarism: (1) that fluctuations in the money supply are the dominant cause of fluctuations in real output; (2) monetarism's use of an expectations-augmented Phillips curve; (3) a monetary approach to exchange rates; and (4) support for monetary policy rules over discretionary policies. It also summarizes Friedman's restatement of the quantity theory and three arguments for adopting a rule-based monetary policy of steady money supply growth.
This chapter discusses monetary theory and policy. It introduces the demand for money curve, which represents the amount of money people hold at different interest rates based on transactions, precautionary, and speculative demands. The supply of money is a vertical line, so equilibrium occurs where demand equals supply. If the money supply increases, interest rates fall and people hold more money. The Fed controls the money supply through tools like reserve requirements and open market operations. Monetarism argues that changes in the money supply directly impact prices, GDP, and employment in the short run. The quantity theory of money posits a direct relationship between money supply and price level when velocity of money and output are stable.
This document outlines the key policies and positions of Thatcherism and modern British conservatism, including support for free markets, small government, privatization, opposition to unions, tax cuts, anti-immigration stances, traditional social values, and skepticism of the welfare state. It also discusses specific policies like privatizing national industries, limiting the power of unions, reducing spending on public services like healthcare, and taking a tough approach to criminal justice.
The document discusses monetary policy in the UK. It explains that the Bank of England uses interest rates and quantitative easing to meet the government's 2% inflation target. Interest rates have been at historically low levels since the financial crisis, but are expected to rise gradually. The main tools of monetary policy are changes to interest rates, the money supply, and currency markets, which influence inflation, growth, and financial stability.
1. The document discusses the relationship between inflation and unemployment, known as the Phillips curve. It shows that in the short-run, lower unemployment can be achieved by increasing aggregate demand, but this leads to higher inflation.
2. In the long-run, monetary policy cannot affect unemployment levels, which return to the "natural rate." The Phillips curve becomes vertical at this natural unemployment rate regardless of inflation levels.
3. The Phillips curve can shift due to changes in expectations about future inflation or due to supply shocks, worsening the tradeoff between inflation and unemployment in the short-run. Reducing inflation requires contractionary policy that raises unemployment.
This document discusses economic systems and market failures in the Canadian economy. It outlines four main economic systems: [1] planned/command economy, [2] market socialism, [3] state capitalism, and [4] market economy. Canada is described as having a mixed economy with private and public ownership. The document also summarizes the views of Adam Smith, John Maynard Keynes, and Karl Marx. It then discusses reasons for government intervention like protecting consumers and workers, and regulating problems caused by the market. Finally, it defines market failures and conditions of rivalry and excludability.
Monetary policy determines the supply and availability of money in an economy in order to achieve objectives like economic growth and price stability. It is implemented by central banks and involves managing interest rates and the money supply. When the economy is slowing, monetary policy aims to increase the money supply and lower rates to boost aggregate demand. When inflation is high, it seeks to tighten the money supply or raise rates to reduce aggregate spending. The goals are macroeconomic stability with low unemployment and inflation alongside steady growth.
1. Monetary policy involves central banks using interest rates, money supply, and exchange rates to influence the economy and meet targets like inflation.
2. The Bank of England sets the official interest rate in the UK and uses other tools like quantitative easing to boost the money supply when rates are low.
3. Changes in interest rates impact borrowing costs, spending, investment, and economic growth, but there are limits to how much lower rates can go and their effectiveness in boosting demand.
1. Classical economics focused on laissez-faire policies and free markets while Keynesian economics emphasized government intervention.
2. Key figures in classical economics included Adam Smith and David Ricardo who believed that free markets would naturally lead to full employment without government intervention.
3. Keynesian economics emerged in response to the Great Depression and rejected classical ideas. Keynes argued that markets may not reach full employment on their own and that government could boost demand through spending and taxation policies.
Balance of Payment Disequilibrium and CausesNeema Gladys
1.Balance of Payment
The balance of payment of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.
2.Componets of BOP
Current Account
It includes imports and exports of goods and services and unilateral transfer of goods and services.
Capital Account
Under this are grouped transactions leading to changes in foreign assets and liabilities of the country.
3. Accounting Treatment of Items (Debit and Credit Items)
Any item which gives rise to a sale of foreign exchange (an inflow) is recorded as a credit item (+) in the accounts e.g. export of goods and services
Any item which gives rise to the purchase of foreign exchange (an outflow) is recorded as a debit item (-) in the accounts e.g imports of goods and services.
4. BOP Disequilibrium
BOP is a double entry accounting record, then apart from errors and omissions, it must always balance.
The BOP deficit or surplus indicate imbalance in the BOP.
This imbalance is interpreted as BOP Disequilibrium.
A country’s balance of payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits).
5.BOP Deficit
A deficit or an unfavorable balance exists when the value of autonomous debit items exceeds the value of autonomous credit items.
6. BOP Surplus
A surplus or a favourable balance exists when the value of autonomous credit items exceeds the value of autonomous debit items.
Milton Friedman was the major founder and intellectual force behind monetarism. Monetarism holds that the money supply is the dominant influence on nominal income and price levels in the short run. It believes that stable growth in the money supply is crucial for economic stability. Friedman proposed a constant money growth rule for monetary policy. Monetarism sees private markets as inherently stable and views instability as caused by government policies. It is skeptical of activist policies and supports rules or targets for long-run monetary growth.
The document discusses the effectiveness of monetary policy from three perspectives: technical, theoretical, and practical. Technically, the IS-LM model is used to explain monetary policy effectiveness. Theoretically, the relative effectiveness of monetary versus fiscal policy is examined from Keynesian and monetarist views. Practically, real-world limitations on monetary policy effectiveness are discussed.
The document discusses the effectiveness of monetary policy from three perspectives: technical, theoretical, and practical. Technically, the IS-LM model is used to explain monetary policy effectiveness. Theoretically, the relative effectiveness of monetary versus fiscal policy is examined from Keynesian and monetarist views. Practically, real-world limitations on monetary policy effectiveness are discussed.
The document discusses the effectiveness of monetary policy from three perspectives: technical, theoretical, and practical. Technically, the IS-LM model is used to explain monetary policy effectiveness. Theoretically, the relative effectiveness of monetary versus fiscal policy is examined from Keynesian and monetarist views. Practically, real-world limitations on monetary policy effectiveness are discussed.
The document provides an overview of the Mundell-Fleming model, which examines how fiscal and monetary policy impact output and exchange rates under different exchange rate regimes. Key points:
1) Under floating exchange rates, fiscal policy has no effect on output while monetary policy is powerful. Under fixed rates, the reverse is true - fiscal policy is powerful while monetary policy has no effect.
2) A country cannot have free capital mobility, an independent monetary policy, and a fixed exchange rate at the same time. It must choose two of the three.
3) Expectations about exchange rate changes can become self-fulfilling prophecies that impact interest rates and currency values in the present. Increased risk perceptions push up
This document summarizes Hicks' interpretation of the LM curve and the IS curve. It then discusses how the IS and LM curves interact in a model to determine equilibrium in both the goods market and financial markets. When the IS and LM curves intersect, both markets are in equilibrium. The document discusses how shifts in fiscal and monetary policy can shift the IS and LM curves, thus changing equilibrium output and interest rates. It also discusses the possibility of a liquidity trap where monetary policy is ineffective at changing output and rates.
This document summarizes the Mundell-Fleming model, which analyzes how fiscal, monetary, and trade policies affect aggregate demand in a small open economy. The model shows that under floating exchange rates, fiscal policy has no effect on output, while monetary policy shifts demand between domestic and foreign goods. Under fixed exchange rates, fiscal policy impacts output while monetary policy does not. Trade restrictions can boost domestic output under fixed but not floating rates. The document also discusses interest rate differentials and currency crises using Mexico's 1994 peso crisis as a case study.
This document summarizes key topics in Chapter 8 of an Intermediate Macroeconomics textbook, including the classical theory of money, Keynesian and monetarist views of money supply, and the role of fiscal and monetary policy during the Great Depression. It discusses the quantity theory of money, assumptions around velocity and full employment, and how Keynes challenged the classical view. It also outlines Friedman's perspective on long and variable lags in policy and the debate around rules versus discretion. Historical data on money supply, stock prices, employment, and tax rates during the Depression are presented.
This document provides an overview of the history and evolution of macroeconomic thought. It discusses classical macroeconomics, the Keynesian revolution in response to the Great Depression, and subsequent challenges to and developments in Keynesian theory including monetarism, rational expectations, and real business cycle theory. Modern macroeconomics incorporates elements of different schools of thought with an emphasis on the role of both aggregate demand and supply factors.
Present study questions the role of monetary policy in general and inflation targeting in particular with the help of important issues related to it and concludes that it is high time for a change. An irony of the inflation targeting is that price stability has amazingly been achieved in Canada simultaneously with an over-leveraged financial system and an over-exposed economy to the debt and assets. And also, the low policy rate regime under the framework has not been able to stop the investment from decline and the real economy from stagnation.
The document summarizes the key ideas of monetarism. It discusses how monetarism reestablished the quantity theory of money and added expectations to the Phillips curve. One of the main monetarist ideas is that changes in the money supply are the predominant factor influencing money income and inflation. The economy is inherently stable unless disturbed by erratic monetary growth, and there is no long-run tradeoff between unemployment and inflation. Monetarism contributed important and lasting ideas to modern macroeconomics.
The document summarizes key concepts from chapter twelve of Mankiw's macroeconomics textbook on aggregate demand in an open economy. It introduces the Mundell-Fleming model and its assumptions. It shows how fiscal and monetary policy impact the economy differently under floating versus fixed exchange rates. Specifically, fiscal policy is powerful under fixed rates but monetary policy is powerful under floating rates. It also examines the effects of changes in the exchange rate, interest rates, money supply, and price levels in the Mundell-Fleming model framework.
Irving Fisher was first economist to make use of concept MEC
in 1920.
He gave it a name Rate of return over cost.
Simply MEC means “expected rate of profitability of new investment”.
It’s calculation depends upon two factors mainly
amount of profit
cost of capital asset
The document discusses theories of the demand for money, including the quantity theory of money, Keynes' liquidity preference theory, and Friedman's modern quantity theory. It explains that the demand for money depends on transactions needs, precautionary savings, speculative motives, and alternative investment opportunities. While early theories viewed velocity as constant, later work by Keynes and others showed velocity is affected by interest rates and financial innovation, making the relationship between money and economic activity more complex.
1. The IS-LM model shows macroeconomic equilibrium through the intersection of the investment-savings (IS) curve and the liquidity-money (LM) curve.
2. Fiscal and monetary policy can shift the IS and LM curves, impacting equilibrium income and interest rates. Expansionary fiscal policy shifts IS right, while contractionary shifts it left. Expansionary monetary policy shifts LM right, while contractionary shifts it left.
3. The effectiveness of fiscal and monetary policy can be undermined by crowding out or a liquidity trap. When money demand is very sensitive to interest rates, fiscal policy expansion may be offset by rising rates. Monetary policy is ineffective in a liquidity trap
The document discusses several topics related to open economies and exchange rate regimes:
1) It examines the Mundell-Fleming model which models a small open economy using IS-LM curves with the exchange rate as an additional variable. Case studies on currency crises in Mexico and Asia are summarized.
2) Issues related to floating vs fixed exchange rates and the impossible trinity are covered. Maintaining a fixed exchange rate limits independent monetary policy.
3) The Chinese currency controversy is discussed, noting China fixed its currency for years while accumulating dollar reserves, to the criticism of some arguing it was undervalued.
1. The document discusses the IS-LM model and how it can be used to analyze the effects of fiscal and monetary policy. It presents the IS and LM curves and how they represent equilibrium in the goods and money markets.
2. Fiscal policy like increases in government spending can shift the IS curve right, raising output and interest rates. Monetary policy like increases in the money supply can shift the LM curve down, lowering interest rates and raising output.
3. Shocks to aggregate demand are analyzed using the IS-LM model, and the model can also show the transition from short-run to long-run equilibrium when prices adjust over time.
This document provides a literature review on the Ricardian Equivalence hypothesis. It discusses the origins of the theory with David Ricardo and how Robert Barro later developed it using assumptions of intergenerational altruism and consumption smoothing. The document reviews debates around Ricardian Equivalence and its key assumptions, such as perfect markets, information, and indifference to taxes vs. debt. Empirical studies are said to relax assumptions to test the theory, with most finding Ricardian Equivalence does not hold given the stringent assumptions required. The goal of the paper is stated as investigating Ricardian Equivalence and the effectiveness of tax cuts, particularly during recessions.
Persistent Slowdowns, Expectations and Macroeconomic PolicySuomen Pankki
This document provides an overview of Seppo Honkapohja's lecture on persistent slowdowns, expectations, and macroeconomic policy. The lecture discusses how recessions like the Great Recession can result in prolonged periods of low growth and interest rates near zero. It presents empirical data showing slow recoveries in the US, Japan, and Eurozone. The lecture then examines different modeling approaches to analyze economies stuck at the zero lower bound, including models based on rational and learning-based expectations. It focuses on analyzing dynamics using a New Keynesian model framework where private agents form expectations using steady-state learning. The lecture discusses how learning dynamics can result in multiple equilibrium states, including a stable high-inflation state and unstable low
The Romans were influenced by Greek ideas but focused more on empire building and power rather than balance. They respected the Greek artistic and intellectual heritage but built a vast empire through strong military and administrative capabilities. While the Romans did not significantly contribute to economic thought, their laws recognized private property and defined key economic concepts like price, money, and loans. Their views on agriculture emphasized small farms and regarded slave labor as inefficient.
New growth theory posits that economic growth results from increasing returns associated with new knowledge rather than diminishing returns to capital and labor. It views technological progress as endogenous and driven by economic activity rather than external forces. Knowledge drives growth through increasing returns, where the benefits of knowledge are not depleted as it is shared, unlike physical capital which faces diminishing returns. This challenged neoclassical theories that treated technology as outside the economy.
New growth theory emphasizes that economic growth results from increasing returns associated with new knowledge, rather than diminishing returns to capital and labor. It views technological progress as endogenous and driven by economic forces like investment in research and development, rather than external factors. This challenged previous neoclassical growth models that treated technology as outside the economic system. New growth theory sparked renewed interest in explaining the sources of long-term economic growth.
The marginal Revolution took place in the latter half of the 19th century and involved a fundamental change in economic analysis from a classical approach focused on supply, production, and cost to a marginalist approach centered on consumption, demand, and utility. The marginalist school analyzed individual decision making of consumers and firms using concepts like marginal utility and developed theories of demand, supply, price determination, and value. Alfred Marshall further advanced marginalism and synthesized it with classical ideas, developing concepts such as consumer surplus, elasticity of demand, and distinguishing between different time periods in price determination.
Thomas Malthus was an 18th century British scholar who developed the theory of population arguing that population grows geometrically while food production grows arithmetically, inevitably leading to food scarcity. He believed preventive checks like moral restraint were needed to slow population growth, otherwise population would be kept in check by "positive checks" like famine, disease and war imposed by nature. Malthus also developed the "iron law of wages" which stated that in the long run, wages cannot rise above the subsistence level and will be pushed back down by population growth outstripping food supply.
David Ricardo (1772-1823) was a British economist who developed theories such as the labor theory of value, comparative advantage, and rent. Some key points about Ricardo's theories include:
- He believed labor determines the long-run price of goods and that international trade benefits both countries based on their comparative advantages in production.
- Ricardo's theory of rent argued that landlords receive economic rent determined by crop prices rather than influencing prices themselves.
- He incorporated Malthus' theory of population growth relative to food supply into his "Iron Law of Wages," which stated wages long-run remain at subsistence level.
Adam Smith is considered the founder of classical economics. In his seminal work "The Wealth of Nations" published in 1776, he outlined several key ideas:
1) He argued that an "invisible hand" in the free market leads to economic prosperity as individuals pursuing their self-interest ultimately benefit society as a whole.
2) He believed that free trade and minimal government intervention are ideal.
3) He explained that division of labor increases productivity and specialization, and is limited by the extent of the market. Wider markets allow for more division of labor.
4) Smith analyzed factors of production including wages, profit, rent and their relationships in a market economy. He believed competition would
The document provides information about the ancient Hebrews. It discusses that the Hebrews had simple economic lives where property was owned by the community rather than individuals and barter was used. Their economic, political, and ethical values were intertwined and dominated by moral values. The introduction defines Hebrews and notes they were the first people to believe in one God. They organized around families and built walled cities for protection. Justice involved an eye for an eye. Most Hebrews were farmers or herders and Canaan was a location for trade. Their concepts of fairness promoted justice under Hebrew law.
Jean-Baptiste Say introduced several important economic concepts, including distinguishing between factors of production (land, labor, capital) and introducing the concept of the entrepreneur. He is best known for "Say's Law", which states that supply creates its own demand. Say's Law was an important idea in classical economics and implied that general overproduction was impossible. It was based on ideas that savings equal investment, and that people only hold money for transactions, not as an asset. While Say's Law may have been intended to describe an equilibrium condition, it was often interpreted as being true at all times, which many classical economists like Mill disagreed with.
1. The document discusses the key concepts and principles of Islamic economics according to various scholars and sources.
2. It outlines the basic principles of Islamic economics such as individual liberty, right to property, social equality, and prohibition of accumulation of wealth by certain groups.
3. Ibn Khaldun is highlighted as a pioneering thinker in economics who made important contributions centuries before Adam Smith, including theories on labor, value, demand and supply, prices, profits, growth, taxation, and foreign trade.
This document provides an overview of John Maynard Keynes and the development of his economic theories. It discusses Keynes' background and education, as well as his major works that broke from classical economics. Specifically, it outlines Keynes' critique of the classical labor market theory, interest rate theory, and demand for money theory. It then explains Keynes' alternative theories regarding these topics. The document also summarizes Keynes' concept of aggregate demand and supply, the multiplier effect, and his views on fiscal and monetary policy to stabilize economies and reduce unemployment.
The Radiant School System was established in 2007 as a private educational organization with 10 employees and minimum qualifications of B.Ed and B.A. It initially faced problems with managing staff, trust, and limited resources. The manager aimed to provide a self-motivated and experienced staff to differentiate the education system. The organization encourages staff through annual rewards based on performance and promotes on merits. It arranges training workshops for underperforming employees and may terminate after two warnings. Evaluation showed unskilled staff outcomes increased from 30-40% to 65-90% after training.
2. • Monetarism is an economic school of thought
that stresses the primary importance of the
money supply in determining nominal GDP
and the price level.
• Monetarism is a theoretical challenge to
Keynesian economics that increased in
importance and popularity in the late 1960s
and 1970s.
4. Continue
• Monetarism is very closely allied with the
classical school of thought.
• An extension of classical theory
• which was developed in the 1960s and 1970s
• Try to explain a new economic phenomenon -
stagflation .
5. Continue
• Much of the Monetarists' work revolved
around the
• Role of expectations in determining inflation,
Development of the expectations-augmented
Phillips Curve .
• Milton Friedman is considered the father of
modern monetarism.
6. •Late 1960s developing macro instability:
Persistent BOT deficit
Inflation edging up
BOP crisis and devaluation 1967.
•Response of government of 1970-4:
•‘Free market’ policies
•But these go wrong.
•In particular, intensified the inflationary
pressures.
7. • The challenge to the traditional Keynesian theory
strengthened during the years of stagflation
following the 1973 and 1979 oil shocks.
• Keynesian theory had no appropriate policy responses
to the supply shocks.
8. • Inflation was high and rising through the 1970s and
Friedman argued convincingly that the high rates of
inflation were due to rapid increases in the money
supply.
• He argued that the economy may be complicated, but
stabilization policy does not have to be.
• The key to good policy was to control the supply of
money.
9. •Monetarist critique:
•‘Monetarists’’ known as Friedman, Chicago
school
•Criticised view that monetary policy is relatively
unimportant / secondary / ‘accommodating’ role
only, i.e. the Keynesian view that:
–ΔM → Δr → Δi, BUT this effect quite weak:
Flattish LM
Steep IS / I r-inelastic
•Called for more debate on monetary policy /
‘money matters’.
10. 10
The Effects of Money Supply Changes on
the Real Economy
Keynesian View Monetarist View
IS LM1 LM2
ISLM1
LM2
? Y Y
rr
11. 11
The Effects of Fiscal Changes
on the Real Economy
Keynesian View Monetarist View
IS1
LM
IS1
LM
?Y Y
rr
IS2
IS2
12. • Characteristics of Monetarism
• Monetarism is a mixture of theoretical ideas,
philosophical beliefs, and policy prescriptions.
Here we list the most important ideas and policy
implications and explain them below. The
theoretical foundation is the Quantity Theory of
Money.
• The economy is inherently stable. Markets
work well when left to themselves. Government
intervention can often times destabilize things
more than they help. Laissez faire is often the best
advice.
13. • The Fed should be bound to fixed rules in
conducting monetary policy.
• They should not have discretion in conducting
policy because they could make the economy
worse off.
• Fiscal Policy is often bad policy. A small role
for government is good.
14. 14 of 38
Monetarism
• The monetarist analysis of the economy
places emphasis on the velocity of money, or
the number of times a dollar bill changes
hands, on average, during a year; the ratio of
nominal GDP to the stock of money (M):
V
GDP
M
or
V
P Y
M
M V P Y
GDP P Y since
then,
15. 15 of 38
The Quantity Theory of Money
• The quantity theory of money is a
theory based on the identity
M x V = P x Y and the assumption
that the velocity of money (V) is
constant (or virtually constant).
Then, the theory can be written as
the following equality:
M V P Y
16. Friedman’s restatement of QTM.
Keynesianism made simplifying assumption:
M and B the only two assets affecting money demand.
i.e. Bonds the only alternative to holding M.
Friedman: No -- other assets apart from bonds also need to be
taken into account, e.g.
residential and other property
consumer-durables
equities, etc.
These are also held as alternatives to money.
17. Cambridge:
MD = kPY
k is factor of proportionality / ‘Marshallian’ or
‘Cambridge’ k.
Reformulates QTM as theory of money demand.
Keynes:
MD = k(r).PY
Not compatible with QTM.
k not constant – cyclical fluctuations, etc.
Friedman:
MD = k(rB, r1 . . . rn).PY
rB: return on bonds
r1 . . . rn : rates of return (explicit or implicit) on
other assets besides bonds. These net out → k = k
i.e. Restatement of QTM.
18. Neutrality of money – LR / SR distinction:
‘Old’ QTM:
ΔM → ΔP only, with ΔY = 0.
i.e. ΔP / ΔM = 1.
Friedman: M is neutral in LR, as in old QTM:
i.e. ΔLRP / ΔM = 1.
BUT: ΔM may have SR effect on Y:
ΔM → ΔP, but also ΔSRY > 0.
i.e. ΔSRP / ΔM < 1.
This SR effect gradually unwinds till we have
ΔLRP / ΔM = 1.
19. Friedman’s Adaptive Expectations Hypothesis / ‘fooling’ model
/ effect of SR changes in MS:
Wage-earners’ expectations of movements in P take time to
adapt.
P↑ and wage-earners underestimate change.
→ they supply more labour than if they had realised how much
their real wage has been eroded by inflation.
Model works symmetrically in reverse / overestimation.
20. P0
Y*
AD0
Y
P
P’
AD1
Y’
SRAS (Pe = P0)
LRAS
Workers supply more
labour → Y↑ because
they think their real
wage has increased
more than it actually
has.
Friedman’s monetarism:
adaptive expectations, and the LR-SR distinction, contd
MS ↑
→ AD ↑
21. Workers realise they
have overestimated their
real wage and adjust it
over successive time
periods, so they reduce
LS, i.e. AS shifts left.P0
Y*
AD0
AD1
Y
P
Y’
SRAS (Pe = P0)
LRAS (Pe = P)
P1
SRAS (Pe = P1)
Friedman’s monetarism:
adaptive expectations, and the LR-SR distinction, contd
(1)
(2)
Eventually Y returns to
Y*
22. Net result is just
inflation and
instability.
P0
P1
YNR
AD0
AD1
Y
P
SRAS (Pe = P0)
LRAS (Pe = P) SRAS (Pe = P1)
P has risen, and Y falls
back to its original level –
the ‘Natural Rate’.
Y returns to YNR --
net result is ΔP only
Friedman’s monetarism:
adaptive expectations, and the LR-SR distinction, contd
23. ‘Natural rate’
‘Old’ classical:
Unique point of equilibrium / self-regulating level.
This is YFE.
Friedman: This is unrealistic.
→ redefined LR sustainable level as ‘natural rate’:
(1) Will always be some unemployment.
At equilibrium / self-sustaining level:
‘natural rate’ – NRU.
(2) NRU is not constant.
Changes with changing labour market conditions.
24. Expectations-augmented Phillips
Curve
• The Phillips Curve showed a trade-off between
unemployment and inflation.
• Friedman then put his mind to whether the
Phillips Curve could be adapted to show
• why stagflation was occurring,
• Include the role of expectations in the Phillips
Curve .
• Hence the name 'expectations-augmented'
Phillips Curve.
25. Continue
• Friedman argued that there were a series of
different Phillips Curves for each level of
expected inflation.
• Friedman was therefore assuming no 'money
illusion'
27. • The Rules vs. Discretion Debate
• Because monetarists believe that the money
supply is the primary determinant of nominal
GDP in the short run, and of the price level in
the long run, they think that control of the
money supply should not be left to the
discretion of central bankers.
• Monetarists believe in a set of "rules" that the
Federal Reserve must follow. In particular,
Monetarists prefer the Money growth rule:
28. • The Fed should be required to target the
growth rate of money such that it equals the
growth rate of real GDP, leaving the price
level unchanged. If the economy is expected
to grow at 2 percent in a given year, the Fed
should allow the money supply to increase by
2 percent. Monetarists wish to take much of
the discretionary power out of the hands of
the Fed so they cannot destabilize the
economy.
29. • Keynesians start at this proposed money
growth rule. Keynesians believe that velocity
is inherently unstable and they do not believe
that markets adjust quickly to return to
potential output.
• Therefore, Keynesians attach little or no
significance to the Quantity Theory of
Money.
• Because the economy is subject to deep swings
and periodic instability, it is dangerous to take
discretionary power away from the Fed.
• .
30. • The Fed should have some leeway or
"discretion" in conducting policy.
• So far, Keynesians have won this debate.
There has not been serious talk in some time of
tying the Fed to a fixed money growth rule
31. • Fiscal Policy
• Because Monetarist dislike big government and
tend to trust free markets, they do not like
government intervention and believe that fiscal
policy is not helpful.
• Where it could be beneficial, monetary policy
could do the job better.
• Excessive government intervention only
interferes in the workings of free markets and
can lead to bloated bureaucracies, unnecessary
social programs, and large deficits. Automatic
stabilizers are sufficient to stabilize the economy.