1. Practice Test #1

2. Fiscal Policy vs. Monetary Policy
I do NOT
set money supply or interest rates!
I do NOT control taxes or spending
Fiscal Policy vs. Monetary Policy
Money Unit Wrap Up

3. Monetary Policy Wrap-Up

4. Monetary vs. Fiscal Policy
Monetary Policy does not put money directly into the economy
Fiscal Policy does! (Taxes & Gov’t Spending)
Instead it depends on cause/effect relationships:
∆ in money supply => ∆ interest rates => ∆ in consumption/ investment
The Fed does not control the amount of money that:
households choose to hold as deposits
bankers choose to lend, individuals choose to borrow
This is why the Fed
feared deflation in !
Credit Crunch

5. Monetarism Summary
Main message: Money is neutral & the economy self-regulates
Use Quantity Theory of Money MV = PY (where V is constant)
Inflation is purely a monetary phenomena
Monetarists do not support activist monetary policy stabilization:
i.e. expanding money supply during bad times and slowing during good
They focus primarily on price stability
Theory not compatible with upward sloping AS curve or Keynesian economics
GDP is an imperfect measure of transactions to use in calculating velocity because it does not include transactions in intermediate goods or in existing assets, some of which are made using money and do influence the number of times money changes hands during a year.

6. Classical Dichotomy
A Pre-Keynesian theory that separates nominal from real variables to analyze an economy
Nominal variables measured in monetary units
Real variables measured in physical units
Classical economists look at real variables---ignore nominal
Assume monetary neutrality for classical dichotomy
Keynesian economists reject this theory
Nominal Interest Rate = Real Interest Rate + Expected Inflation
Real Interest Rate = Nominal Interest Rate – Expected Inflation
Review:

7. Practice Free Response

8. Austrian Economics Friedrich Hayek (1899 – 1992)
Austrian School of Economics
Against active Fed Policy
Promoted “self regulation” of free market
Believed low interest rates led to Malinvestment

9. Round 2 Round 2 http://www.youtube.com/watch?v=GTQnarzmTOc Round 1

10. The Inflation Tax
When the federal reserve prints money it is said to levy an inflation tax
a tax on everyone who holds money or saves money
Interest earned on savings is 100% taxed even though part of it merely compensates for inflation