MONETARY ECONOMICS

Monetary Economics

Monetary Economics

Discuss the major similarities and differences between Friedman's and Lucas' analysis of the effectiveness of monetary policy in influencing real variables. (You do not need to describe their respective models in detail but you should discuss the salient features of their theories.)

Introduction

The central notion of monetarism is that the coin falls on the short-term economic fluctuations of the economy and inflation, or is the price trend. Part of the central notion trait you most differs from Keynesian approach, is that what matters is the amount of money and not interest rates, money market conditions, credit conditions, and things like that. Set of tools used by a national government or the central bank of a country to vary the amount of money in the economy to directly influence the value of the currency, on production, investment, consumption and inflation (Taylor 2007, p.195). Monetary policy, which aims to sustain economic activity by providing liquidity and financial agents for the appropriations needed to consume, invest and produce, it should not be overly restrictive because it would risk blocking economic growth, not too expansionary in To the extent that such a situation would favour the increase in inflation (the general rise in prices) by injecting too much purchasing power in an economy that does not have enough assets to meet demand.

The Instruments Of Monetary Policy

Central banks have several methods to implement monetary policy that suits your goals. Some methods have become his favourite instruments of intervention, while others have fallen into disuse. Other instruments of monetary policy actions can be noted on the system of bank credit and the modification of its required reserves. One type of monetary policy in this regard would be, for example, forcing banks to deposit in an account not paid by the central bank a proportion of their deposits and time deposits, which are reserve requirements, and cannot freely use nor, therefore, be used to increase lending in the economy (Keynes 2006, p.45). By modifying the types of required reserves, the central bank or credit encourages penalized.

Other instruments are used in monetary policy intervention in the money market and rediscount operations: since banks must refinance before the central bank (reserve money that is not available in unlimited quantities), are obliged to accept the cost of such refinancing, which varies according to policies established by the monetary authorities. By increasing the cost (the discount rate), those induced banks to increase their own interest rates to their customers, thus slowing lending activity (to reduce this cost, we observe the opposite effect). The intervention in the money market (financial market serves to refinance banks directly, bypassing the central bank) allows the latter to control the price of money indirectly. When buying or selling securities in the open market (these operations are called open market), the central bank changes the terms of credit.

Discussion

After the classical economy into crisis during the Great Depression by not being able to satisfactory answers to the phenomenon that was developing with the advent ...