THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 18

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 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 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 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 592 593 594 594 594 595