Morgan Harvey
8 April 2014
ECON 122
First and
foremost I would like to go over the definition of money neutrality. According to Mankiw from the book, Principles
of Macroeconomics (2012), money neutrality occurs when the supply of money has
an affect on nominal variables such as wages, prices of goods, and nominal GDP
but has no effect on real GDP or employment (Mankiw, 2012, p. 354). For example, if the Federal Reserve were to
decide to increase the money supply, the price of goods would increase and
payments to employees would also increase.
Basically dollar values are directly correlated with the supply of
money. As we learned earlier this year
from Mankiw (2012), as prices increase so does supply because firms want to
make more money. If prices were to
decrease, supply would also drop because firms would be making less money
(Mankiw, 2012, p. 73). Money neutrality
and real variables have no relationship because when there is a change in money
supply, things like how productive workers are or interest rates do not
change.
Money
neutrality has a bigger impact on things in the short run. This is because the change of prices or
nominal variables in general, creates “confusion and mistakes” (Mankiw, 2012,
p. 354). On the other hand, real
variables are affected little because the number of jobs will stay the same
even if more money is printed.
Now for
monetary policy, if the money supply were to increase banks would have more
money to give out loans. More loans
would create a smaller interest rate on each loan because the bigger quantity
of loans would make up for a decreased interest rate. This would also cause an increase in output,
the number of goods and services produced, because consumers would have more
money to invest.
Monetary
policy is controlled by the government and more specifically the Fed. If the Fed finds money supplies to be low
they will buy government bonds and stock increase the supply. On the contrary, if supplies are too high the
government can sell these securities to decrease money supply. Their main goal is to control interest rates,
employment, and keep prices fair. These
goals can be accomplished by open markets, reserve requirements and discount
rates (FederalReserveEducation.org, 2011).
Open markets are what I just previously discussed, the Fed having the
ability to fluctuate reserves. Reserve
requirements mandate banks to keep a portion of what customers deposit on hand
rather than loaning it out. Lastly,
according to FederalReserveEducation.org (2011) discount rates are simply “the interest rate charged by
Federal Reserve Banks to depository institutions on short-term loans.”
In conclusion, the main objective is
to achieve an equilibrium of output. If our
country were in a recession we would use policy to create more goods because if
output were decreasing unemployment would be decreasing as well which would
create the recession in the first place (Christensen, 2012).
References
Lars
Christensen. (2012, October 13). The Market Monetarist: Market Matter, Money
Matters…”Money neutrality” – normative rather than positive. [Web log comment].
Retrieved from http://marketmonetarist.com/2012/10/13/money-neutrality-normative-rather-than-positive/
Federal
Reserve. (2011). Monetary Policy Basics. In FederalReserveEducation.org
Retrieved from http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy/
Mankiw,
Gregory. (2012). Principles of Macroeconomics: Sixth Edition.
Mason, OH: South-Western Cengage Learning.
No comments:
Post a Comment