1 / 9

Monetarism

Monetarism. Economics Klein Oak High School. Basic Assumption. “quantity theory of money” based on equation of exchange MV = PQ M = money stock V = monetary velocity P = price level Q = quantity of goods (real GDP). Other Assumptions. Velocity (V) is constant

candice-howell
Download Presentation

Monetarism

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Monetarism Economics Klein Oak High School

  2. Basic Assumption • “quantity theory of money” • based on equation of exchange • MV = PQ • M = money stock • V = monetary velocity • P = price level • Q = quantity of goods (real GDP)

  3. Other Assumptions • Velocity (V) is constant • or changes in predictable ways • Money is neutral • Changing M doesn’t change Q.

  4. Conclusion • Changing M changes P

  5. Policy Goal • price stability • because instability causes uncertainty • recession and • inflation

  6. Policy Recommendation • M should increase at constant rate • enough to allow growth in economy • need enough new dollars to buy increased supply of goods • Generally, M should grow at about 3-4% per year.

  7. Criticisms • V isn’t constant • M can change Q • Keeping M constant causes fluctuations in interest rates • because the supply of money is half of what determines interest rates • It’s hard to measure M

  8. Conclusions • Dramatic changes in M can cause instability • post WWI Germany • Control of M does tend to stabilize prices • in the long run

  9. “Gold Bugs” • a.k.a. hard money advocates • believe the money supply should be tied to the supply of gold • FED Chairman Alan Greenspan • price of gold is a reliable measure of M times V • If the price of gold is rising, we should slow monetary growth.

More Related