November 11, 2003
Monetary Economics
These two questions are the source of the ongoing disagreements about monetary economics and monetary policies. It is hard to say "It is all a matter of supply and demand," when you cannot agree on the definitions of the quantity and price.
The transactions demand for money depends (in a fable from the Keynesians) on a balance between interest on bank deposits and shoeleather consumed by trips to the bank. Unlike the classical economists, who thought the velocity of money was constant, the Keynesians focus on the changes in velocity caused by changes in the interest rate.
The supply of money in a fractional reserve banking system can be controlled by executing open market operations.
Posted by bparke at 03:38 PM