CHAPTER 15
THE DEBATE OVER MONETARY AND FISCAL POLICY
TEST YOURSELF
2.
Year
Velocity
2010
8.15
2011
7.19
2012
6.64
2013
6.34
The money supply was
increased in 2008 in response to the financial crisis and economic downturn.
At the same time, the velocity of money has declined most likely as a
result of this significant economic downturn.
The decline in velocity over these years is in contrast to the
substantial increase from 1975 to 1995.
However, of that time period there was some volatility and years in
which velocity declined. In that
sense, the trends from both time periods are somewhat similar.
DISCUSSION QUESTIONS
2.
Textbook
Figure 1 shows that V2 is much more stable than V1
over the long run; in fact there is no long run trend in V2. If
the Fed targets M1, therefore, it may actually destabilize the economy; it
would be more sensible to target M2.
3.
The policy lag is the
time it takes to enact a change in macroeconomic policy. The expenditure lag
is the time it takes for that change in policy to affect the economy, once
enacted. Monetary policy has a much shorter policy lag, since the Federal
Open Market Committee can make any decision it wishes at its monthly
meeting, while taxation or expenditure changes often take months, even
years, to work their way through the administration and Congress. Fiscal
policy has the shorter expenditure lag, however, since the early rounds of
the multiplier are the more powerful, and since consumption adjusts more
quickly than investment. The response of business investment plans to
changes in interest rates may take a year or more to occur.