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Keynesianism is to Keynes as Monetarism is to Alan Greenspan. Paul O’Neill. Claude Monet. Milto PowerPoint Presentation
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Keynesianism is to Keynes as Monetarism is to Alan Greenspan. Paul O’Neill. Claude Monet. Milto - PowerPoint PPT Presentation


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

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Presentation Transcript
slide1

Monetarism

  • Keynesianism is to Keynes as Monetarism is to
      • Alan Greenspan.
      • Paul O’Neill.
      • Claude Monet.
      • Milton Friedman.
slide2

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.

slide3

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

slide4

MV = PQ

V is the velocity of money.

P is the price level.

Q is the economy’s output.

PQ is total expenditures (E).

slide5

MV = PQ

M is the money supply.

M1 = $ 1,181.81 billion

M2 = $ 5,464.94 billion

MZM = $ 5,677.96 billion

slide6

MV = PQ

This is the “Equation of Exchange.”

slide7

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.

slide8

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.
slide9

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

slide11

E = PQ = Y

E is total expenditures (PQ)

Y is total income

Y = $ 10,221.60 billion

slide12

MV = Y

M1 = $ 1,181.81 billion

Y = $ 10,221.60 billion

V = Y/M = 8.64

slide13

MV = PQ

In normal times:

V doesn’t change much.

Q changes in the low single digits.

slide14

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.

milton friedman 1912
Milton Friedman (1912-
  • MV = PQ
  • Inflation is always and everywhere a monetary phenomenon!!!
slide16

Sidewalk Survey on Dexter Avenue:

“What’s the cause of inflation?”

Greed.

Oil companies.

Medical industry.

Home-building industry.

Labor unions.

slide17

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.

slide18

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?

slide19

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.

slide20

?

CPI = avg.(p1, p2, p3, p4, poil, … pn)

Good arithmetic; bad economics.

MV = PQ

slide21

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).

slide22

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.

slide23

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.

milton friedman 191224
Milton Friedman (1912- )
  • MV = PQ
  • Inflation is always and everywhere a monetary phenomenon!!!
slide25

Keynesianism

vs

Monetarism

slide26

Monetarism

MV = PQ

slide27

Monetarism

MV = PQ

18-30 months

In the long run, increases in M affect nothing but P (and W).

slide28

Monetarism

MV = PQ

18-30 months

This is the Quantity Theory of Money.

slide29

Monetarism

MV = PQ

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

slide30

Monetarism

MV = PQ

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

slide31

Keynesianism

MV = PQ

slide32

Keynesianism

MV = P(QC+QI)

Prices are “sticky downward.”

Investment suffers from a waning of “animal spirits.”

Consumption falls as the economy spirals downward.

slide33

Keynesianism

MV = P(QC+QI)

People begin to hoard money (“V” falls) and may even become “fetishistic” in their money-hoarding propensities.

slide34

Keynesianism

MV = P(QC+QI +QG)

The government should increase the money supply enough to offset people’s “fetishistic” propensities and….

slide35

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.

milton friedman 191236
Milton Friedman (1912- )
  • MV = PQ
  • Inflation is always and everywhere a monetary phenomenon!!!