ch19Debates in Macroeconomics Monetarism,(宏观经济学-Karl Case, R

CHAPTER

19Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side EconomicsPrepared by: Fernando Quijano and Yvonn Quijano

© 2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

Keynesian Economics In a broad sense, Keynesian economics is the foundation of modern macroeconomics. In a narrower sense, Keynesian refers to economists who advocate active government intervention in the economy.

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

Keynesian Economics Two major schools decidedly against government intervention have developed: monetarism and new classical economics.

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

Monetarism The main message of monetarists is that money matters. Monetarism, however, is usually considered to go beyond the notion that money matters.

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Karl Case, Ray Fair

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

Monetarism The monetarist analysis of the economy places emphasis on the velocity of money, or the number of times a dollar bill changes hands, on average, during a year; the ratio of nominal GDP to the stock of money (M):GDP V Mor V

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P Y M

since

then,

M V P YKarl Case, Ray Fair 5 of 38

GDP P Y

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Principles of Economics, 7/e

Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

The Quantity Theory of Money The quantity theory of money is a theory based on the identity M x V = P x Y and the assumption that the velocity of money (V) is constant (or virtually constant). Then, the theory can be written as the following equality:

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M V P YPrinciples of Economics, 7/e Karl Case, Ray Fair 6 of 38

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

The Quantity Theory of Money If there is equilibrium in the money market, then the quantity of money supplied is equal to the quantity of money demanded. When M is taken to be the quantity of money demanded, this equality would make the quantity of money demanded dependent on nominal GDP, but not the interest rate.

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Debates in Macroeconomics: Monetarism, New Classical Theory, and S

upply-Side Economics

The Quantity Theory of Money The demand for money may depend not only on nominal income, but also on the interest rate. Whether velocity is constant or not may depend partly on how we measure the money supply.

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

The Velocity of Money, 1960 I – 2003 II

The velocity of money is far from constant. There is a rising long-term trend, but fluctuations around this trend have been quite large.Principles of Economics, 7/e Karl Case, Ray Fair 9 of 38

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

Inflation as a Purely Monetary Phenomenon Inflation is always a monetary phenomenon. If the money supply does not change, the price level will not change. The view that changes in the money supply affect only the price level, without a change in the level of output, is called the ―strict monetarist‖ view.Principles of Economics, 7/e Karl Case, Ray Fair 10 of 38

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

Inflation as a Purely Monetary Phenomenon The ―strict monetarist‖ view is not compatible with a nonvertical AS curve. Almost all economists agree that sustained inflation is purely a monetary phenomenon. Inflation cannot continue indefinitely without increases in the money supply.Principles of Economics, 7/e Karl Case, Ray Fair 11 of 38

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

The Keynesian/Monetarist Debate Milton Friedman has been the leading spokesman for monetarism over the last few decades. Most monetarists argue that inflation in the United States could have been avoided if only the Fed had not expanded the money supply so rapidly.

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Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

The Keynesian/Monetarist Debate Most monetarists do not advocate an activist monetary policy stabilization—expanding the money supply during bad times and slowing its growth during good times.

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