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Monetarism
Economic theory emphasizing money supply's role.
Milton Friedman
Key figure in developing monetarist theory.
Nominal income
Income measured in current dollars.
Real variables
Economic factors unaffected by money supply.
Cyclical movements
Fluctuations in economic activity over time.
Money growth rate rule
Constant rate of money supply increase proposed.
Central bank
Institution controlling money supply and interest rates.
Price level
Average of current prices in the economy.
Private sector stability
Assumption that businesses operate without government interference.
Government policies
Actions taken by government affecting economic stability.
Long run
Period where economic factors adjust fully.
Short run
Period where prices and wages are sticky.
Keynesian economics
Theory prioritizing demand over money supply.
Classical quantity theory
Theory linking money supply to price levels.
Economic activity
Production and consumption of goods and services.
Labor force quality
Skill level and productivity of workers.
Stock of capital goods
Total physical assets used in production.
Monetary policy
Regulation of money supply to influence economy.
Stability in money supply
Consistent growth rate of money for economic health.
Wage rates
Price paid for labor services.
Inflation
Increase in prices leading to decreased purchasing power.
Discretionary monetary policy
Flexible approach to monetary policy based on current conditions.
Economic orthodoxy
Established economic theories widely accepted at a time.
Monetarist Proposition 4
Private sector is not the source of instability.
Karl Brunner
Monetarist who emphasized private sector stability.
Government Instability
Instability caused by government money supply growth.
Adjustment Mechanisms
Natural processes in private economy for stability.
Mandatory Controls
Government regulations on prices and wages.
Usury Ceilings
Limits on interest rates set by government.
Rent Controls
Government limits on rental prices.
Minimum Wage Laws
Government-mandated lowest wage for workers.
Quantity Theory of Money
MV = PT; relationship between money and economy.
Milton Friedman
Economist who redefined quantity theory of money.
Velocity of Money
Rate at which money circulates in economy.
Proposition 1 of Monetarism
Stable velocity means M changes affect PT.
Great Depression Impact
Discredited classical economics and quantity theory.
Keynesian System
Framework where money is an economic determinant.
IS Schedule
Graph showing relationship between income and interest rates.
Government Spending Increase
Shifts IS schedule, raising income and interest rates.
Transactions Demand for Money
Money needed for everyday purchases and transactions.
Speculative Demand for Money
Desire to hold money for future investments.
Interest Rate Increase
Occurs when money demand exceeds supply.
Positive Velocity Variation
Velocity increases with higher interest rates.
Monetarist Policy Conclusions
Insights derived from monetarist analysis of money.
Economic Activity Determinants
Factors influencing the level of economic activity.
Friedman's Counter-revolution
Restatement of quantity theory post-Keynesian critique.
IS Schedule
Represents investment-savings equilibrium in Keynesian model.
LM Schedule
Represents liquidity preference-money supply equilibrium.
Government Spending Increase
Shifts IS schedule right, raising income and interest.
Velocity of Money
Ratio of income to money supply, increases with income.
Interest Rate
Cost of borrowing money, affects investment decisions.
Liquidity Trap
Condition where low interest rates fail to stimulate investment.
Interest Elasticity of Money Demand
Sensitivity of money demand to changes in interest rates.
Investment Inelasticity
Low responsiveness of investment to interest rate changes.
Early Keynesian Economists
Believed money's role was minimal during depressions.
Depression Conditions
Characterized by low income and low interest rates.
******* Interest Rates
Fixing interest rates to stabilize financial markets.
Monetary Policy Goals
Aim for low and stable interest rates.
Fiscal Policy
Government spending and taxation to influence economy.
Aggregate Demand
Total demand for goods and services in economy.
Empirical Judgments
Decisions based on observed data and trends.
Steep IS Schedule
Indicates high investment sensitivity to interest rates.
Flat LM Schedule
Indicates low responsiveness of money demand to interest rates.
World War II Financing
Bonds sold at low rates to fund war expenditures.
Bond Prices and Interest Rates
Inversely related; low rates increase bond value.
Excess Capacity
Underutilization of resources during economic downturns.
Fiscal Policy Effectiveness
Influenced by slopes of IS and LM schedules.
Money Supply Increase
Shifts LM schedule but may not affect income.
Stability in Financial Markets
Desired outcome from ******* interest rates.
******* Interest Rate
Fixing interest rates affects money supply control.
Monetary Authority
Entity controlling money supply and interest rates.
Equilibrium in Money Market
Balance between money supply and demand at interest rate.
Early Keynesians
Economists who downplayed money supply importance.
Monetarist View
Focus on money supply's role in economic activity.
Great Depression
Severe economic downturn in the 1930s.
Quantity Theory of Money
Money supply directly affects price levels.
Nominal GNP
Total economic output measured in current prices.
Real GNP
Economic output adjusted for inflation.
M1 Money Supply
Currency plus checkable deposits.
M2 Money Supply
M1 plus savings accounts and other deposits.
Aggregate Price Level
Overall level of prices in an economy.
Spending Hypothesis
Depression caused by declines in aggregate demand components.
Money Hypothesis
Depression attributed to declines in money supply.
Interest Elasticity of Money Demand
Sensitivity of money demand to interest rate changes.
Liquidity Trap
Condition where interest rates are low, money demand is high.
Autonomous Declines
Independent decreases in consumption, investment, and exports.
Stock Market Crash 1929
Event triggering economic decline leading to the Depression.
Overbuilding in Construction
Excessive building activity before the Depression onset.
International Monetary System Breakdown
Failure of global financial systems contributing to the Depression.
Friedman's Analysis
Monetarist perspective on economic activity and money supply.
Milton Friedman
Economist advocating for the importance of money supply.
Quantity Theory of Money
Theory linking money demand to nominal income.
Cambridge Approach
Focuses on demand for money in economics.
Money Demand (Md)
Amount of money people wish to hold.
Nominal Income
Product of price level (P) and real income (Y).
Proportional Relationship
Direct correlation between two economic variables.
Factor of Proportionality (k)
Constant in short run affecting money demand.
Exogenous Money Supply (M)
Money supply set by monetary authority.
Velocity of Money (V)
Rate at which money circulates in economy.
Keynes's Money Demand Theory
Emphasizes money's role as an asset.
