Does the Money Supply Matter?

Anderson, Ch. 22

Important Concepts

• MZM– 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– 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– 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– 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– 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