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Keynesianism is to Keynes as Monetarism is to Alan Greenspan. Paul O’Neill. Claude Monet. Milton

# Keynesianism is to Keynes as Monetarism is to Alan Greenspan. Paul O’Neill. Claude Monet. Milton

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## Keynesianism is to Keynes as Monetarism is to Alan Greenspan. Paul O’Neill. Claude Monet. Milton

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1. Monetarism • Keynesianism is to Keynes as Monetarism is to • Alan Greenspan. • Paul O’Neill. • Claude Monet. • Milton Friedman.

2. Derrick Jeter earns a lot of money. Steve Forbes has a lot of money. It’s better to buy a house when money is cheap. I need to cash a check to get some money. Money facilitates the exchange of goods and services.

3. Derrick Jeter earns a lot of money. Steve Forbes has a lot of money. It’s better to buy a house when money is cheap. I need to cash a check to get some money. Money facilitates the exchange of goods and services. CASH CREDIT MONEY INCOME WEALTH

4. MV = PQ V is the velocity of money. P is the price level. Q is the economy’s output. PQ is total expenditures (E).

5. MV = PQ M is the money supply. M1 = \$ 1,181.81 billion M2 = \$ 5,464.94 billion MZM = \$ 5,677.96 billion

6. MV = PQ This is the “Equation of Exchange.”

7. The equation of exchange is so near and dear to Milton Friedman’s heart that he C. has written a parody to the popular Y.M.C.A to memorialize the equation in song. • has made his wife Rose promise that it will make a tasteful appearance on his head stone. D. has adopted it as his vanity license plate number for his Cadillac Eldorado. B. has had it spelled out in pansies in the flower garden at Stanford’s Hoover Institution.

8. The equation of exchange is so near and dear to Milton Friedman’s heart that he • tasteful appearance on his head stone. • B. spelled out in pansies in flower garden. • C. parody to the popular Y.M.C.A. • D. vanity license plate number.

9. MV = PQ M1 = \$ 1,181.81 billion US Population = 286,528,728 Per capita M1 = \$4,124.57 Per family of four: \$16,298.28

10. E = PQ

11. E = PQ = Y E is total expenditures (PQ) Y is total income Y = \$ 10,221.60 billion

12. MV = Y M1 = \$ 1,181.81 billion Y = \$ 10,221.60 billion V = Y/M = 8.64

13. MV = PQ In normal times: V doesn’t change much. Q changes in the low single digits.

14. MV = PQ So, what happens when M is doubled—say, from \$ 1,181.81 billion to \$ 2,363.62 billion? P would also double. But the doubling of P takes time.

15. Milton Friedman (1912- • MV = PQ • Inflation is always and everywhere a monetary phenomenon!!!

16. Sidewalk Survey on Dexter Avenue: “What’s the cause of inflation?” Greed. Oil companies. Medical industry. Home-building industry. Labor unions.

17. The Jane Fonda bull-by-the-horn approach to ending inflation. Identify major groups of products whose prices have risen the most: energy, medical, housing, food. Enact pricing policies that hold the prices in these areas down and thereby counter the inflationary pressures.

18. What about the major groups of products whose prices have fallen the most: computers, cameras, electronics. Is the economic activity in these areas creating deflationary pressures?

19. MV = PQ CPI = avg.(p1, p2, p3, p4, p5, … pn) The P in the equation of exchange is measured by the CPI (or the WPI or GPI), which is a price index. The index tracks the average of all prices.

20. ? CPI = avg.(p1, p2, p3, p4, poil, … pn) Good arithmetic; bad economics. MV = PQ

21. CPI = avg.(p1, p2, p3, p4, poil, … pn) Many other prices go down. --the price of complements (RV’s) --the price of so-called “normal” goods generally (restaurant meals). Some other prices go up, too. --the price of substitutes (firewood). --the price of goods and services for which oil in a substantial input (airfares).

22. 10. Suppose that unrest in the Middle East causes a reduction in the supply of oil flowing to the U.S., which leads to a 20% increase in the price of oil. Economists who accept the quantity theory of money will claim that A. prices in general will rise because everything depends upon (is related to) oil. B. the Federal Reserve should increase the money supply so that people can pay the higher gas prices. C. whatever the Federal Reserve does, there will be substantial inflation–although not a 20% inflation rate. D. there will be no inflation in the U.S. so long as the Federal Reserve does not increase the money supply.

23. 31. Suppose that new taxes on tobacco products cause the tax-included price of cigarettes to double. Microeconomists would predict that the quantity of tobacco products bought will fall only slightly and that total spending on cigarettes will more-than-double. Monetarists would claim that the tax will A. result in a slightly higher rate of inflation. B. cause the Federal Reserve to undertake compensatory policy actions. C. have no effect on the general price level. D. result in a slightly higher velocity of money.

24. Milton Friedman (1912- ) • MV = PQ • Inflation is always and everywhere a monetary phenomenon!!!

25. Keynesianism vs Monetarism

26. Monetarism MV = PQ

27. Monetarism MV = PQ 18-30 months In the long run, increases in M affect nothing but P (and W).

28. Monetarism MV = PQ 18-30 months This is the Quantity Theory of Money.

29. Monetarism MV = PQ Policy recommendation: Increase M at a slow, steady rate (2 or 3%) to match the long-run rate of growth.

30. Monetarism MV = PQ With this “Monetarist Rule” in effect (2 or 3%) and a constanct V, the rate of inflation would be zero.

31. Keynesianism MV = PQ

32. Keynesianism MV = P(QC+QI) Prices are “sticky downward.” Investment suffers from a waning of “animal spirits.” Consumption falls as the economy spirals downward.

33. Keynesianism MV = P(QC+QI) People begin to hoard money (“V” falls) and may even become “fetishistic” in their money-hoarding propensities.

34. Keynesianism MV = P(QC+QI +QG) The government should increase the money supply enough to offset people’s “fetishistic” propensities and….

35. Keynesianism MV = P(QC+QI +QG) …to finance the fiscal policy (such as an increase in government spending) required to drive the economy back to its full-employment level of income.

36. Milton Friedman (1912- ) • MV = PQ • Inflation is always and everywhere a monetary phenomenon!!!