Does the Money Supply Matter? Anderson, Ch. 22

Important Concepts MZM Velocity of Money Money with zero maturity In between M1 and M2 Velocity of Money Number of times each year money is spent M2/GDP

Important Concepts Monetarists Equation of Exchange revival of classical principles Money supply doesn’t affect GDP Money neutrality Equation of Exchange Money supply x velocity = price level x output MV = PQ

Important Concepts Quantity Theory of Money Monetary Rule Monetarist belief Velocity of money and output are both fixed Therefore, increasing money supply only results in inflation Monetary Rule Monetarist belief that the Fed should target growth in money supply to growth of GDP

Important Concepts Keynesian beliefs Phillips relationship Monetary policy can counter inflation Fiscal policy can counter unemployment Phillips relationship Unemployment and inflation move in opposite directions Stagflation counters this belief

Important Concepts Rational expectations Supply-side economics The belief that businesses will anticipate government policy and therefore act in ways to counter it (shifting the supply curve) Supply-side economics The belief that policy can shift aggregate supply through tax cuts Claims of job growth and increased government revenue largely discredited

Important Concepts Neo-Keynesian Economics Return to belief that “sticky wages” and other prices prevent the economy from self-adjustment Reject rational expectations argument Firms can’t easily adjust costs