ECON 101 Lecture Notes - Lecture 5: Monetarism, Balance Equation

• School: Stanford University
• Department: Economics
• Course: ECON 101
• Professor: Adrien Auclert

Document Summary

The simple equation of exchange is an identity that states mv = py. It was turned into the quantity theory of money in the classical model through the. Ms leads to a proportionate py, which may be controlled by central bank. This meant that there was a direct and proportionate relationship between m and py. This view was largely destroyed by the keynesian introduction of asset demand and transaction demand for money. (ma + mt). The original keynesian view saw i and v being positively related since as i , large in ma and small in mt and so v . However, ms and v are negatively related due to. Net v small since mt by smaller %. So a change in ms has unpredictable but typically small effects on py. Thus, monetary policy is weak as it only has a small effect on py.