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In this Section, we will outline four differing theories of money supply theory, focussing primarily on the weaknesses of each. These four theories are set out schematically in Table 2, roughly in the
In section 3 we look at why the money supply is endogenous in modern economies. In section 4 we review some recent attempts, related to what is often called the ‘new consensus macroeconomics’, to construct a model of monetary policy in macroeconomics which avoid the pitfalls and misrepresentations of the LM curve.
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This new framework has neither 'serious definitional' problems nor would it result in an 'inadequate' and 'misleading' monetary analysis and policy. In fact, it is the use of 'broad' definition of money and multiple. measures of money which results in. misleading and inconsistent monetary analysis.
In economics money is de–ned as an asset (a store of value) which functions as a generally accepted medium of exchange, i.e., it can be used directly to buy any good o⁄ered for sale in the economy.
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- The Definition of Sterilization Operations
- Hume’s Price Specie-Flow Mechanism
- PPP: Definitions
- P 5 EP*
- E 5 P / P*
- 19.4 PPP in the Model of the Balance of Payments
- 19.5 Summary
- The Idealized Gold Standard
- The Effect of a Monetary Expansion in the Monetarist Model
What is at stake here is “sterilization.” It is important to understand the difference between what happens when the central bank practices sterilization of international reserve flows and what happens when it does not.This distinction is relevant for under-standing the difference between how major industrialized countries, especially the United St...
The monetary approach to the balance of payments can be traced back to eighteenth-century philosopher and economist David Hume. Hume attacked the mercantilists, who believed that a country’s power depended on amassing gold and silver (specie), and who thus restricted trade to maximize the inflow of specie through the balance of payments. Hume, like...
Purchasing power parity, or PPP, is simply the name for the following equation:
where E is the exchange rate, and P and P* are the domestic and foreign price levels, respectively. It could also be written,
We are not ready to draw any conclusions about causality, about whether changes in E cause changes in P or the other way around. PPP is just a condition, not in itself a com-plete theory of determination of the price level or the exchange rate. The equation has a long history.Many economists consider it discredited.Certainly it is inconsistent with...
We now adopt the assumption that prices are perfectly flexible, so that PPP holds.
This chapter introduced two new concepts into our study of economies that operate under fixed exchange rates.The first concept was the flow of international reserves into or out of a country through the balance of payments. This reserve flow changes its monetary base endogenously over time if the central bank either cannot or does not choose to ste...
There are many senses in which the world “lost its innocence” in World War I.The era before 1914 often is recalled with fond, and sometimes overly idealized, nostalgia as an era of unprecedented economic growth and stability under the gold standard.The defi-nition of a gold standard is that central banks fix the value of their currencies in terms o...
A monetary expansion shifts the H schedule down. The size of the downward shift is determined by the size of the change in the vertical intercept (dDM). The economy moves to point M.Any given P implies a certain level of money demand.At the level implied by the exogenously given P 5 E P *, an excess supply of money is now evident because money supp...
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In this course, we explore the characteristics of money and credit as well as their role for economic growth. We investigate why do banks exist and how they compete. We analyse the causes and consequences of banking crises. We assess different crisis-prevention tools that have been used and adapted over time, taking account of current debates and
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reFIGURE 4Response to a Change in Expected InflationWhen expected inflation rises, the supply curve shifts from Bs 1. o Bs 2, and the demand curve shifts from Bd 1 to Bd 2. The equilibrium moves from point 1 to point 2, causing the equi-librium bond price to fall fr. Price of Bonds, P. sing the price of bond.
