ECO 1302 Chapter Notes - Chapter 14: Monetary Policy, Liquidity Trap, Monetary Base

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Nominal gdp is always proportional to money stock: the quantity theory of money assumes that velocity is approximately constant. In that case: equation of exchange can also be represented as % m + % v = % p + % y. Ideally, this equation of exchange could be used to predict and control nominal gdp growth by predicting and controlling growth rate of money. In reality, velocity is not fixed, but the quantity theory is still valid: velocity is measured separately form m1+ and m2+ (figure 1, p. 306, the (cid:448)elo(cid:272)ities do(cid:374)"t (cid:373)o(cid:448)e i(cid:374) ta(cid:374)de(cid:373, some determinants of velocity, efficiency of payment system. Cash generates no interest, chequable accounts pay very little. Incentive to limit cash holdings depends on ease and speed for exchanging money for other assets; computerization, credit/debit cards, etc. Improvements in payment system have made it harder (even impossible) to predict velocity. Keynesianism seeing the economy as first being affected by interest rates.

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