Monetarist

1
Monetarist Keynesian Models of Monetary Policy

• By Professor Jermaine Whirl
• For Students of East Georgia College

2
Quantity Theory of Money

• Developed by Classical Economist
• States that movements in the prices level result
  solely from changes in the quantity of money
  (money supply).
• MVPQ
• M Money
• VVelocity of Money Money velocity is the
  average rate at which a specific piece of money,
  like a coin or dollar bill, is used to make
  successive exchanges. (Fixed in the short run)
• PAverage Price Level
• QAmount of goods and services transacted. Real
  Output (fixed in the short run)
• If Y and V are fixed in the short run, then P
  M, meaning that increases in the MS lead a
  corresponding increase in inflation. This is one
  the important implications of the Quantity
  Theory, that increases in the MS lead to
  proportionate increases in the Price Level. 
  "Inflation is always and everywhere a monetary
  phenomenon."

3
Keynesian Money Demand (liquidity Preference
Theory)

• According to Keynes people demand money for three
  reasons
• Precautionary Motive (Classical) Cash balances
  held in case of unforeseen outlays, essentially
  of a transaction nature (e.g. unforeseen medical
  bill).  Though vary between individuals,
  reasonable to expect that in the aggregate,
  related to real income in nominal terms to
  price level. 

• Transaction Motive (Classical)
• required for normal day-to-day transactions, and
  real value of this transactions demand will be
  closely related to real income of economy.  The
  assumption real volume of transactions closely
  related to real income of economy. 
• Speculative Demand (Keynesian) (or Asset Demand)
  for speculative financial transactions

4
Monetarist Policies

• Milton Friedman stated that individuals make
  decisions based on their permanent income.
• Friedman state that Fed should allow a computer
  to increase the money supply by 2-3 a year, to
  keep pace with growth of the economy which is
  generally 2-3 a year.

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MD/MS
Interest Rate
MS
MD
Quantity of Money