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Ch15 Lo - Monetary
Ch15 Lo - Monetary
Transmission Mechanisms
The impact that changes
in the money market have
on the goods and services
market and whether that
impact is direct or
indirect; and the routes
and ripple effects created
in the money market
travel to affect the goods
and services market are
known as the
transmission
mechanism.
Keynesian Transmission
Mechanisms
Because the Keynesian transmission mechanism is indirect,
both interest insensitive investment demand and the liquidity
trap may occur.
Q&A
Explain the inverse relationship between bond
prices and interest rates.
According to the Keynesian transmission
mechanism, as the money supply rises, there is a
direct impact on the goods and services market.
Do you agree or disagree with this statement.
Explain your answer.
Explain how the monetarist transmission
mechanism works when the money supply rises.
Q&A
Why are Keynesians more likely to advocate
expansionary monetary policy to eliminate a
recessionary gap than contractionary monetary
policy to eliminate an inflationary gap?
How might monetary policy destabilize the
economy?
If the economy is stuck in a recessionary gap, does
this make the case for activist monetary policy
stronger or weaker? Explain your answer.
A Gold Standard
The money supply would be tied to the stock of
gold.
The government sets the price of gold at some
dollar amount.
The government promises to buy and sell gold at
the official price.
Critics charge that a gold standard is no guarantee
against inflation.
Critics also charge that a reduction in national
output and an increase in unemployment will
result if prices do not fall in the same proportion
when the gold-backed money supply is reduced.
A Gold Standard
Q&A
Would a monetary rule
produce price
stability? Explain
your answer.
How would the gold
standard (described in
the text) work?