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Monetary Policy Synthesis

Monetary Policy Synthesis. The impact of adding money to the economy is focused on two pathways. The first is that the increase in the money supply automatically increases the level of income through the theory of the Velocity of Money.

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Monetary Policy Synthesis

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  1. Monetary Policy Synthesis The impact of adding money to the economy is focused on two pathways. The first is that the increase in the money supply automatically increases the level of income through the theory of the Velocity of Money. The second pathway is that if there is no change in production then the tangible output of the economy must increase in price through the Fischer Effect. This means that interest rates must rise in order to maintain a capital pool sufficient to fund at least the needed repair and maintenance investments for the infrastructure of the economy. The result is that the monetary policy impact force and the interest rates and income to move in tandem

  2. Analytics of Monetary Policy Synthesis The Loanable funds measure of income Y increases and the interest rate r increases as the money supply is increased. r Y

  3. The Policy Framework • Both Fiscal and Monetary policy impact the level of income that is available to fuel the economy and hence contribute to economic growth. • John Maynard Keynes demonstrated that the interaction between Investment Savings and Liquidity Modulation would lead to an equilibrium through which a government may be able to establish a long term plan for economic stability and growth. • The issues that government might use to set targets revolve around full employment of all resources including labor and capital according to definitions of these factors that may well be culturally and socially defined. Further if the economy is managed according to universal suffrage and democratic ideals, then this approach might also lead to re-election. • It is common that governments have taken up this approach, particularly in the west, but it has fallen into some disrepute when its is applied to economies that have a high degree of international dependence and multinational concentration of industry.

  4. The IS-LM Model in Action The Policy Targets of R* and Y* balance Fiscal and Monetary Policy to meet political objectives as well as economic goals. r LM R* IS Y Y*

  5. Historical Footnote • Keynes showed how to balance political and economic goals as a method of recovery from the Great Depression and was knighted as recognition. • His policies were also used to restart national economies after World War II and to recover from economic calamities including the 2008 recession. • Nonetheless he was criticized for advocating an approach to economics that seemed to rely on spending as opposed to saving. • He was unable to develop any longer term prediction models and was almost bankrupt on several occasions.

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