Econ 4.3

Monday, March 29, 1999

Announcements: Homeworks 8 is due on Friday. Answers for the past homeworks are on the web. Online Quzzes for Chapters 10, 11 and 12 will be taken offline on Wednesday, March 31, at 8 am. The exam is next Wednesday.

Lecture notes:  

Keynesian Money Market with Liquidity Trap

• If the money supply is expanded, the interest rate goes down
• There comes a point when the monetary policy has no effect on the interest rate and this is the Keynesian Liquidity Trap

Monetary Policy

• Easy Money Policy
  • increase money supply
  • reduce interest rate
  • increase investment
  • increase GDP
  • decrease foreign demand for $US
  • dollar depreciates
  • net exports increase
  • GDP increases
• Tight Money Policy
  • decrease money supply
  • raise interest rate
  • reduce investment
  • reduce GDP
  • increase foreign demand for $US
  • dollar appreciates
  • net exports decrease
  • GDP decreases

Monetarist Short and Long Run View of Monetary Transmission and Price Level

MV = PQ

Short Run

• Expand MS --> AD shifts to the right
• Decrease MS --> AD shifts to the left
• Recession Adjustment: prices fall, full employment is restored

Long Run

• Prices Rise, full employment, GDP doesn't change