Lesson Plan - Monetary Theory and Policy
- I. Definitions/Basics
- - what kind of assets make up wealth?
- - money
- - either no interest is paid or it is relatively low.
- - bonds, certificate of deposits, etc.
- - earn a fixed interest rate (how else are bonds/CDs
different than money?)
- - real capital (plants, equipment, real estate,
etc.)
- - for simplicity, assume only two assets
- - money = M1
- - bonds = all other assets
- - what is the relationship between bond prices and the market
rate of interest?
- - assert a negative relationship between the two
- - why?
- - example
- II. The market for money
- - the supply of money
- - recall that the Fed controls the supply of money
- - the demand for money - why do people wish to hold money?
- - transaction demand for money
- - precautionary demand for money
- - speculative demand for money
- - real vs. nominal demand for money
- - graphs of money demand
- - the market for money - putting supply and demand together
- - what is the price of money?
- - what is equilibrium in the market?
- - suppose not at the equilibrium. What moves the market
back to the equilibrium?
- - what impact does changing money demand or supply have on the
market?
- - increase (decrease) in money demand will increase
(decrease) the market rate of interest (i)
- - decrease (increase) in money supply will increase (decrease)
the market rate of interest (i)
- - how do changes in the money supply affect the macro economy?
- - the Keynesian transmission mechanism
- - recall that as the market rate of interest increases that
Investment spending decreases (why?)
- - if the Fed increases the money supply, i decreases, which
causes I to increase
- - but when I increases, aggregate expenditures also increases
- - the increase in aggregate expenditures causes equilibrium
output and income (Y) to increase also
- - impact on AD?
- - and the reverse?
- - how do changes in MD affect the macro economy?
- - the classical transmission mechanism
- - the equation of exchange
- - what is the velocity of money?
- - M*V = P*Q
- - both velocity (V) and output (Q) are assumed fixed (why?)
hence changes in the money supply only affect prices.
- - the classical view of investment
- - classical monetary transmission
- - monetarism
- - demand for money
- - transmission mechanism
- - differences between the three theories
- - transmission mechanisms
- - velocity of money
- - demand for money
- - impact of money on investment
- - final impact on economy
- III. Monetary Policy
- - what is monetary policy?
- - how effective is it compared to fiscal policy?
- - the keynesian viewpoint
- - the monetarist viewpoint