ECON 101 Lecture Notes - Lecture 18: Loanable Funds, Monetarism, Money Supply
Document Summary
The impact of monetary policy: a brief historical background. The keynesian view dominated during the 1950s and 1960s. Keynesians argues that money supply did not matter much. Monetarists challenged the keynesian view during the 1960s and. Monestarists argued that changes in the money supply caused both inflation and economic instability. While minor disagreements remain, the modern view emerged from this debate. Modern keynesians and monetarists agree that monetary policy exerts an important impact on the economy. Every major contraction in this country has been either produced by monetary disorder or greatly exacerbated by monetary disorder. Every major inflation episode has been produced by monetary expansion. Equilibrium: the money interest rate gravitates toward the rate where the quantity of money people want to hold (demand) is just equal to the stock of money the fed has supplied. The supply of money is vertical because it is established by the fed and, hence, determined independently of the interest rate.
