THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 18
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xviii
Contents
To Peg or Not to Peg: Exchange-Rate
Targeting as an Alternative Monetary
Policy Strategy . . . . . . . . . . . . . . . . . . . . 540
Advantages of Exchange-Rate Targeting . .
Disadvantages of Exchange-Rate
Targeting . . . . . . . . . . . . . . . . . . . . . .
When Is Exchange-Rate Targeting
Desirable for Industrialized Countries? .
When Is Exchange-Rate Targeting
Desirable for Emerging-Market
Countries? . . . . . . . . . . . . . . . . . . . . . .
Currency Boards . . . . . . . . . . . . . . . . . . .
Dollarization . . . . . . . . . . . . . . . . . . . . . .
. 540
. 541
. 543
. 543
. 544
. 544
Global Argentina s Currency Board . . . . . . . . 545
Summary . . . . . . . . . .
Key Terms . . . . . . . . .
Questions . . . . . . . . .
Quantitative Problems
Web Exercises . . . . . .
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546
547
547
548
548
PA RT V I I Monetary Theory . . . . . . . . 549
Crisis and Response: The Perfect Storm of
Adverse Shocks . . . . . . . . . . . . . . . . . . . 549
CHAPTER 21
The Demand for Money . . . . . . . . . . . . . . 551
Learning Objectives . . . . . . . . . . . . . . . . . .551
Preview . . . . . . . . . . . . . . . . . . . . . . . . . . . 551
Quantity Theory of Money . . . . . . . . . . . . . 552
Velocity of Money and Equation of
Exchange . . . . . . . . . . . . . . . . . . . . . . . 552
Quantity Theory of Money . . . . . . . . . . . . . 553
Quantity Theory of Money Demand . . . . . . 553
Application TestableTheoretical
Implications of the QuantityTheory
of Money Demand . . . . . . . . . . . . . . . . . . . . 554
Is Velocity a Constant? . . . . . . . . . . . . . . . . 555
Keynes s Liquidity Preference Theory . . . . . 556
Transactions Motive . . . . . . . . . . . .
Precautionary Motive . . . . . . . . . . .
Speculative Motive. . . . . . . . . . . . .
Putting the Three Motives Together
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556
556
556
557
Further Developments in the Keynesian
Approach . . . . . . . . . . . . . . . . . . . . . . . . 559
Transactions Demand. . . . . . . . . . . . . . . . . 559
Precautionary Demand. . . . . . . . . . . . . . . . 561
Speculative Demand . . . . . . . . . . . . . . . . . 562
Friedman s Modern Quantity Theory of
Money . . . . . . . . . . . . . . . . . . . . . . . . . . 563
Distinguishing Between the Friedman and
Keynesian Theories . . . . . . . . . . . . . . . . 565
Empirical Evidence on the Demand for
Money . . . . . . . . . . . . . . . . . . . . . . . . . . 567
Application Empirical Estimation of Money
Demand Functions . . . . . . . . . . . . . . . . . . . . 567
Interest Rates and Money Demand . . . . . . . 568
Stability of Money Demand . . . . . . . . . . . . 568
Summary . . . . . . . . . .
Key Terms . . . . . . . . .
Questions . . . . . . . . .
Quantitative Problems
Web Exercise . . . . . . .
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569
570
570
570
571
CHAPTER 22
The ISLM Model . . . . . . . . . . . . . . . . . . . . 572
Learning Objectives . . . . . . . . . . . . . . . . . .572
Preview . . . . . . . . . . . . . . . . . . . . . . . . . . . 572
Determination of Aggregate Output . . . . . . 572
Consumer Expenditure and the
Consumption Function . . . . . . . . . . . . . 574
Investment Spending . . . . . . . . . . . . . . . . . 575
FYI Meaning of the Word Investment . . . . . . . 576
Equilibrium and the Keynesian Cross
Diagram . . . . . . . . . . . . . . . . . . . . . . . . 576
Expenditure Multiplier . . . . . . . . . . . . . . . . 578
Application The Collapse of Autonomous
Consumer Expenditure and the Great
Depression in the United States . . . . . . . . . 580
Government s Role . . . . . . . . . . . . . . . . . . 581
Role of International Trade. . . . . . . . . . . . . 583
Summary of the Determinants of
Aggregate Output . . . . . . . . . . . . . . . . . 584
The ISLM Model . . . . . . . . . . . . . . . . . . . . . 586
Equilibrium in the Goods Market:
The IS Curve. . . . . . . . . . . . . . . . . . . . . 587
Equilibrium in the Market for Money:
The LM Curve . . . . . . . . . . . . . . . . . . . . 590
ISLM Approach to Aggregate Output and
Interest Rates . . . . . . . . . . . . . . . . . . .
Summary . . . . . . . . . . . . . . . . . . . . . . . .
Key Terms . . . . . . . . . . . . . . . . . . . . . . .
Questions . . . . . . . . . . . . . . . . . . . . . . .
Quantitative Problems . . . . . . . . . . . . . .
Web Exercises . . . . . . . . . . . . . . . . . . . .
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592
593
594
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595
