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To: Elroy Jetson who wrote (17090)	2/11/2004 12:44:18 AM
From: GraceZ	Read Replies (2) \| Respond to of 306849

How is money created? How do you make money?

To: Elroy Jetson who wrote (17090)	2/11/2004 2:54:29 AM
From: gpowell	Read Replies (1) \| Respond to of 306849

But the extra money makes people think they have more Capital, so it tends to trick them into spending - so Monetarism is simply a disguised form of Keynesian stimulation. This is the monetary misperceptions theory, which is not well supported and unnecessary in any case to account for the affect of an increase in the money supply. Changes in reserves make their way into the economy through various mechanisms, or channels. The primary conduits are the interest rate channel, the wealth channel, the credit channel, and the expectations channel. The interest rate channel and the wealth channel respond to changes in reserves through the federal funds rate, which influences nominal market rates and, because of some degree of price stickiness, the real rate of interest. Specifically, the interest rate channel operates on the economy because changes in the real rate of interest affect the intertemporal consumption and investment spending preferences of economic agents. Similarly, the wealth channel operates because the level of interest rates directly affects the relative price of assets, and consequently the wealth and therefore the consumption decisions of consumers. The credit channel operates through the loanable funds market. Any addition of reserves expands the credit available to consumers and business. Further, in synergy with the wealth channel, changes in asset prices change the balance sheet of economic agents and thus their credit worthiness. Each of these transmission mechanisms, operate to transmit reserve changes into the economy. They operate with variable speeds and strengths. Yet, all are dependent upon price and wage rigidities to have any real economic effect. If economic agents have perfect knowledge, no restrictions or costs to price adjustment or asset allocation, and there is symmetrical risk to price adjustment, then any change in policy would have little real economic impact. The expectations channel operates through economic agents’ expectations of future actions of the monetary authority. Any economic variable that is partly derived though intertemporal considerations, such as asset prices, interest rates, and exchange rates can be affected by shifts in expectations. Since an economic agent’s intertemporal spending and investment decisions are based upon expectations of future values, the monetary authority can influence market prices of these variables with announcements of future policy actions. Obviously, the effectiveness of these announcements is dependent upon the credibility of the monetary authority. Thus, rational expectations can greatly affect the effectiveness of monetary policy.