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1、1 Chapter5 MonetaryTheoryandPolicy FinancialMarketsandInstitutions 7e JeffMaduraCopyright 2006bySouth Western adivisionofThomsonLearning Allrightsreserved 2 ChapterOutline MonetarytheoryTradeofffacedbytheFedEconomicindicatorsmonitoredbytheFedLagsinmonetarypolicyAssessingtheimpactofmonetarypolicyInte
2、gratingmonetaryandfiscalpoliciesGlobaleffectsofmonetarypolicy 3 MonetaryTheory PureKeynesianTheoryOneofthemostpopulartheoriesinfluencingtheFedDevelopedbyJohnMaynardKeynesSuggestshowtheFedcanaffecttheinteractionbetweenthedemandformoneyandthesupplyofmoneytoinfluence InterestratesTheaggregatelevelofspe
3、ndingEconomicgrowth 4 MonetaryTheory cont d PureKeynesianTheory cont d CanbeexplainedbyusingtheloanablefundsframeworkDemandforandsupplyofloanablefundsdeterminetheequilibriuminterestrateThebusinessinvestmentscheduleillustratestheinverserelationshipbetweeninterestratesonloanablefundsandthelevelofbusin
4、essinvestment 5 MonetaryTheory cont d PureKeynesianTheory cont d CorrectingaweakeconomyTheFedwoulduseopenmarketoperationstoincreasethemoneysupplyAhigherlevelofthemoneysupplywouldreduceinterestratesLowerinterestratesencouragemoreborrowingandspendingKeynesianphilosophyadvocatesanactiveroleforthegovern
5、mentincorrectingeconomicproblems 6 MonetaryTheory cont d S2 CorrectingaWeakEconomy D1 i2 i1 S1 DemandandSupplyofLoanableFunds BusinessInvestmentSchedule i1 i2 B1 B2 7 MonetaryTheory cont d PureKeynesianTheory cont d CorrectinghighinflationTheFedwouldsellTreasurysecurities decreasethemoneysupply Alow
6、erlevelofthemoneysupplyreducesthelevelofspendingLessspendingslowseconomicgrowthandreducesinflationarypressure demand pullinflation 8 MonetaryTheory cont d S1 CorrectingHighInflation D1 i1 i2 S2 DemandandSupplyofLoanableFunds BusinessInvestmentSchedule i2 i1 B2 B1 9 MonetaryTheory cont d PureKeynesia
7、nTheory cont d EffectsofacreditcrunchonastimulativepolicyTheeconomicimpactofmonetarypolicydependsonthewillingnessofbankstolendfundsIfbanksareunwillingtoextendcreditdespiteastimulativepolicy theresultisacreditcrunchAcreditcrunchcanoccurduringarestrictivepolicysincesomeborrowerswillnotborrowbecauseoft
8、hehighinterestrates 10 MonetaryTheory cont d QuantityTheoryandtheMonetaristapproachThequantitytheorysuggestsaparticularrelationshipbetweenthemoneysupplyandthedegreeofeconomicactivityintheequationofexchange VelocityistheaveragenumberoftimeseachdollarchangeshandsperyearTherightsideoftheequationistheto
9、talvalueofgoodsandservicesproducedIfvelocityisconstant achangeinthemoneysupplywillproduceapredictablechangeinthetotalvalueofgoodsandservices 11 MonetaryTheory cont d QuantityTheoryandtheMonetaristapproach cont d AnearlyformofthetheoryassumedaconstantQAssumesadirectrelationshipbetweenthemoneysupplyan
10、dpricesUnderthemodernquantitytheoryofmoney theconstantquantityassumptionshasbeenrelaxedAdirectrelationshipexistsbetweenthemoneysupplyandthevalueofgoodsandservices 12 MonetaryTheory cont d QuantityTheoryandtheMonetaristapproach cont d VelocityrepresentstheratioofmoneystocktonominaloutputVelocityisaff
11、ectedbyanyfactorthatinfluencesthisratio IncomepatternsFactorsthatchangetheratioofhouseholds moneyholdingstoincomeCreditcardsInflationaryexpectations 13 MonetaryTheory cont d ComparisonoftheMonetaristandKeynesianTheoriesTheMonetaristapproachadvocatesstable lowgrowthinthemoneysupplyAllowseconomicprobl
12、emstoresolvethemselvesKeynesianapproachwouldcallforaloosemonetarypolicytocurearecession 14 MonetaryTheory cont d ComparisonoftheMonetaristandKeynesianTheories cont d MonetaristsareconcernedaboutmaintaininglowinflationandarewillingtotolerateanaturalrateofunemploymentKeynesiansfocusonmaintaininglowune
13、mploymentandarewillingtotolerateanyinflationthatresultsfromstimulativemonetarypolicies 15 MonetaryTheory cont d TheoryofRationalExpectationsHoldsthatthepublicaccountsforallexistinginformationwhenformingitsexpectationsSuggeststhathouseholdsandbusinesswillusehistoricaleffectsofmonetarypolicytoforecast
14、theimpactofanexistingpolicyandactaccordinglyHouseholdsspendmorewithaloosemonetarypolicytoavoidinflationBusinesseswillincreasetheirinvestmentwithaloosemonetarypolicytoavoidhighercostsLabormarketparticipantswillnegotiatehigherwageswithaloosemonetarypolicySupportstheMonetaristviewthatchangesinmonetaryp
15、olicydonothaveasustainedimpactontheeconomy 16 MonetaryTheory cont d Whichtheoryiscorrect TheFOMCrecognizesthevirtuesandlimitationsofeachtheoryTheFOMCadjustsmonetarygrowthtargetstocontroleconomicgrowth inflation andunemploymentRecognizingtheMonetaristview theFOMCisconcernedabouttheinflationresultingf
16、romaloosemonetarypolicy 17 TradeoffFacedbytheFed Ideally theFedwouldlike LowinflationSteadyGDPgrowthLowunemploymentThereisanegativerelationshipbetweenunemploymentandinflationPhillipscurveAtightmoneypolicycancurbinflationbutincreaseunemploymentandviceversa 18 TradeoffFacedbytheFed cont d ImpactofotherforcesonthetradeoffCostfactorssuchasenergycostsandinsurancecostscaninfluencethetradeoffWhenbothinflationandunemploymentarehigh Fedmembersmaydisagreeastothetypeofmonetarypolicythatshouldbeimplemented
