the department of the treasury is the government agency responsible for managing the money supply in the united states.
which government agency is responsible for managing the money supply in the united states?
the department of the treasury
challenging the traditional view, monetarists and new keynesians like j. bradford delong, lawrence summers and christina romer argued that recovery was essentially complete prior to 1942 and that monetary policy was the crucial source of pre-1942 recovery. the extraordinary growth in money supply beginning in 1933 lowered real interest rates and stimulated investment spending. according to bernanke, there was also a debt-deflation effect of the depression which was clearly offset by a reflation through the growth in money supply. however, before 1992 scholars did not realize that the new deal provided for a huge aggregate demand stimulus through a "de facto" easing of monetary policy. while milton friedman and anna schwartz argued in "a monetary history of the united states" (1963) that the federal reserve system had made no attempt to increase the quantity in high-powered money and thus failed to foster recovery, they somehow did not investigate the impact of the monetary policy of the new deal. in 1992, christina romer explained in "what ended the great depression?" that the rapid growth in money supply beginning in 1933 can be traced back to a large unsterilized gold inflow to the u.s. which was partly due to political instability in europe, but to a larger degree to the revaluation of gold through the gold reserve act. the roosevelt administration had chosen not to sterilize the gold inflow precisely because they hoped that the growth of money supply would stimulate the economy.
new deal
the money supply function for this situation is plotted on the same graph as the liquidity preference function. the money supply is determined by the central bank decisions and willingness of commercial banks to loan money. though the money supply is related indirectly to interest rates in the very short run, the money supply in effect is perfectly inelastic with respect to nominal interest rates (assuming the central bank chooses to control the money supply rather than focusing directly on the interest rate). thus the money supply function is represented as a vertical line – money supply is a constant, independent of the interest rate, gdp, and other factors. mathematically, the lm curve is defined by the equation formula_4, where the supply of money is represented as the real amount "m"/"p" (as opposed to the nominal amount "m"), with "p" representing the price level, and "l" being the real demand for money, which is some function of the interest rate and the level of real income. the lm curve shows the combinations of interest rates and levels of real income for which the money supply equals money demand – that is, for which the money market is in equilibrium.
is–lm model