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