Presentation on theme: "ECO 317 Intermediate Macroeconomics. Instructor Jing Li (sounds like Lee) 7-year experience of teaching at US colleges Second year at MU Married with."— Presentation transcript:
Monetarism In long run, price is mainly affected by money supply Inflation rate equals growth rate of money supply if assuming fixed income and constant velocity What if those two assumptions fails?
Quantitative Easing (as a Policy Tool) http://www.youtube.com/watch?v=PTUY16Ck S-k http://www.youtube.com/watch?v=PTUY16Ck S-k http://en.wikipedia.org/wiki/Quantitative_eas ing http://en.wikipedia.org/wiki/Quantitative_eas ing
Classical Dichotomy According to the long run classical theory, money is neutral (monetary neutrality): the money supply does not affect real variables The theoretical separation of real and nominal variables is called classical dichotomy Real variables are studied in Chapter 3 Price is determined in Chapter 4 They jointly determine nominal variables
Fisher Equation Application of Classical Dichotomy
Discuss Dear Professor Li, I am in your 317 class and had a question regarding interest rates. Prior to class today I was reading an article that stated that a main reason why our economy has not felt the same effects of having a 70% debt to GDP ratio is that we have lower interest rates compared to European countries who have similar debt-GDP ratios(but these countries have higher interest rates). If our economies are similar in terms of this ratio, how come we have such a lower interest rate in comparison to a country such as Spain? Also, thanks for an enjoyable class today. Stephen H.
Answer US real interest rate is low because high (foreign) supply of loanable fund. Spain is opposite US nominal interest rate is low because of quantitative easing
Review Nominal vs Real Y: Real GDPPY: Nominal GDP W/P: Real WageW: Nominal Wage r: Real Interest Ratei: Nominal Interest Rate
Classical Dichotomy Money does not affect real variables Real variables are determined in Chapter 3 Price is determined in Chapter 4