1. Quantitative Easing & Austrian Economics
I buy bonds to add “money to the economy”
Quantitative Easing & Austrian Economics

2. ↑ Discount Rate Should the Federal Reserve Raise Interest Rates? MS1
Sell Bonds ↓MS => ↑Federal Funds Rate
MS1 MD
Interest
Rate
Qty of $
MS2 i2 i1

3. Quantity Theory of Money
What: Monetarist Theory which states the quantity of money determines the value of money (inflation)
i.e. the primary cause of inflation is the growth of money supply
Implication: In long run, ↑ MS has no effect on real GDP
↑ MS only raises price level (inflation)
“Inflation is always and everywhere a monetary phenomenon”
Milton Friedman Leading Monetarist Economist

4. Business Cycle & Monetary Policy
Potential GDP A B C D E
Actual and
Potential GDP
Actual GDP
Time
Copyright © 2003 South-Western/Thomson Publishing. All rights reserved.

5. Bernanke Interview Part II

6. Bernanke Interview Recap
Bernanke’s Structural Solutions

7. Quantitative Easing The Federal Reserve ran out of options
When interest rates hit 0.0% in 2009
The Fed traditionally only controls short term interest rates (currently = 0.0%)
Quantitative Easing is an attempt to lower long term interest rates (10-year bond)

8. 10-Year Gov’t Bond Interest Rate
4.5%
1.8%

9. Austrian Economics Friedrich Hayek (1899 – 1992)
Austrian School of Economics
Against active Fed Policy
Promoted “self regulation” of free market
Believed low interest rates led to Malinvestment

10. Keynes vs. Hayek

11. Cause & Effect of Monetary Policy
Solution: Expansionary Monetary Policy
↓ Discount Rate
Buy Bonds => ↑ MS => ↓ Federal Funds Rate
Money Market
AS/AD Model
MS2 i2
LRAS1
Nominal
Interest
Rate
MS1
Price
Level
SRAS1
Affects AD
AD2 P2 Y2 i1 E1 E2 P1 E1
AD1 E2 MD Y1
Real
GDP
Qty of $