True False 111.Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability. Question 10 options: A) the crowding-out effect reduces investment. 37. D) it causes the value of the dollar to depreciate. How has the government promoted wage inflexibility? Start studying 104. The Quantity Theory of Money: The Long-Run Because monetarists believe that markets are stable and work well, they believe that the economy is always near or quickly approaching full employment. So no matter what happens to prices (inflation), we will end up at full-employment. Most published rates are nominal rates, while real rates remove the effects of inflation. ✓ Because businesses may be able to borrow from foreign banks at cheaper rates. Key Concepts: Terms in this set (11) Monetarists theory. Using the equation of exchange and assuming full employment and a constant velocity of money, a decrease in the required reserve ratio would result in a, According to the extreme monetarist position, using the equation of exchange, an increase in the quantity of money in circulation will, If a lender desires to earn a return of 4 percent on a loan and the anticipated rate of inflation is 1 percent, the lender should charge a, If the anticipated inflation rate is 5 percent and the nominal interest rate is 9 percent, the real interest rate will be, If the nominal interest rate is a constant 15 percent and anticipated inflation falls from 10 percent to 7 percent, the real interest rate would change from, According to Keynesians, fiscal policy affects.   They also tend to watch real interest rates rather than nominal rates. Monetarists argue that the velocity of money: a) Is constant b) Is reduced when fiscal policy puts idle money balances to work c) Increases when there is a recession because people accumulate money balances d) Increases as much as total spending falls so that MV remains constant . ✓ Reserve requirements or the discount rate, or through open market operations. Monetarists more likely to place emphasis on reducing inflation than keeping unemployment low. STUDY. Monetarists … ✓ Monetary policy will be unable to reduce interest rates further to stimulate investment. Question 8 options: Why does an increase in the money supply cause inflation? The fed allowed the money supply to fall by roughly one-third during that period. Monetarist: A monetarist is an economist who holds the strong belief that the economy's performance is determined almost entirely by changes in the money supply. ✓ The money supply increases, interest rates decrease, investment increases, and AD increases. price and wage flexibility provided by competetive markets should cause fluctuations in aggregate demand to alter product resource prices rather than output and employment. Which of the following is most likely to occur if the Fed pursues expansionary monetary policy? 10) Monetarists argue that V in the equation of exchange is stable and thus a change in M will bring about a direct and proportional change in nominal GDP. C) Long term Aggregate Supply will be vertical at Natural Rate of Unemployment. Monetarists criticization of stabilization policies, Monetary policy: ineffective due to lags, can destabilize economy if timing is bad, Monetarists argue that the FED must increase MS at, a fixed annual rate that would increase output, so that prices would remain stable, % change M + % change V= %change P + % change Y, the quantity theory of money: in the long-run, the price level moves in proportion with changes in MS, In the LR, the price level moves in proportion with changes in the MS, Is it possible to have low inflation and low unemployment at the same time? However, over the LR, it is possible. Such policy was unstable and harmful, he argued. D) Individuals hold idle balances for rational reasons. econ test 2; finals ; Monetarists argue that money supply growth is an important part of managing fluctuations in the business cycle. 400 billion of nominal GDP/100 billion of money, the actual amount of money supplied equals the amount of money the public wants to hold, If the actual amount of money held is greater than the amount of holding desired, the reaction of the public (households and businesses). ✓ Downward-sloping to the right because people wish to hold less money at higher interest rates and more money at lower interest rates. 10 Monetarists argue that: A) Increase in Money Supply is likely to lead to inflation only. True False (True Answer ) 1258 Monetarists argue that discretionary monetary policy does more harm than good. According the mainstream view, what are 2 sources that instability in the economy arises from? True False 112.In the monetarist view, the economy is inherently stable, but the mismanagement of monetary policy creates instability. ✓ The equilibrium output will increase but the price level will stay the same until full employment is reached. This represents the, The speculative demand for money is related to money functioning as a, Ceteris paribus, the quantities of money people are willing and able to hold. ADVERTISEMENTS: On the other hand, there are some who argue […] However, most Monetarists (e.g. Monetarists. Monetarists argue that the velocity of money: a) Is constant b) Is reduced when fiscal policy puts idle money balances to work c) Increases when there is a recession because people accumulate money balances d) Increases as much as total spending falls so that MV remains constant . Why does an increase in the money supply cause inflation? caroloopa. They believe the expansion of the money supply will end recessions and boost growth. C) The total demand for money equals the asset demand for money. Using AD-AS model. D. changes in transfer payments. C. changes in tax rates. If the Fed's objective is to stimulate the economy, which of the following gives the correct sequence of events? The distinction between Keynesian and monetarists positions is a bit more blurred. downward wage inflexibility through the minimum wage law, pro-union legislation, guaranteed prices for certain farm products, pro-business monopoly legislation, ect. ✓ Reduce interest rates and increase aggregate demand. B) the velocity of money is predictable. Eventually, nominal wages fall and real output returns to its full employment level. Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate: Demand will have a large effect on the price level, but a temporary effect on output Which idea is associated with mainstream economics? Learn. asked Aug 19, 2019 in Economics by pampam015. • Monetarists argued that changes in the money supply can cause both inflation and economic instability. Monetarists argue that business fluctuations are caused by . On the one hand, some theorists put the emphasis on a direct relation between the money supply and expenditure. Monetarists say that income can vary in the short run, but the short run could be a long time and therefore make monetary policy ineffective, Keynesians argue that the LRAS is not necessarily inelastic they argue that the economy can be below full capacity for a long time. Real Business-Cycle View, outcome after a large increase in AS, Shift the LR AS curve right= real output increase=money demand increase=money supply in crease=AD increase=real output increases, no change in price level, In Real-Business Cycle View, real output can increase or decrease but there is, The AD curve in the real-business cycle view will shift the same amount as. Thus a change in M leaves V unaffected but brings a corresponding change in expenditure (MV) in the economy. Under conditions of full employment, that rise in AD raises the price level. Investment. American economist Milton Friedman is generally Which of the following is true about the equilibrium rate of interest? wide booms and busts. D )All of above. Friedman then went on to make a more direct argument against Keynesian policy. ✓ Aggregate demand, prices, and nominal interest rates only. B) The velocity of money increases as real GDP increases. econ test 2; finals ; Monetarists argue that fiscal policy is ineffective because. Learn vocabulary, terms, and more with flashcards, games, and other study tools. So the demand for money falls. A) Changes in the money supply have no effect on real variables. Related. Monetarists argue that changes in the money supply. Business cycles are caused by real factors that affect aggregate supply rather than by monetary or spending, factors that cause fluctuations in aggregate demand. 10 Monetarists argue that: A) Increase in Money Supply is likely to lead to inflation only. *The market system … True (True Answer ) False 1257 Keynesian theory argued that monetary policy could be very effective during a depression. Which of the following is true, according to monetarists? ✓ The Fed can change it by changing the money supply, The Fed can change the equilibrium rate of interest by changing. The market system would provide substantial macroeconomic stability... were it not for government interference in the economy, Monetarists see that the government has promoted. On the one hand, some theorists put the emphasis on a direct relation between the money supply and expenditure. Discover how the debate in macroeconomics between Keynesian economics and monetarist economics, the control of money vs government spending, always comes down to proving which theory is better. Question 10 options: A) the crowding-out effect reduces investment. Monetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal interest rates, and (4) the role of monetary aggregates in policy analysis. The monetarists argue that in the long run V is determined totally independently of the money supply (M). Monetarists believe that the Great Depression occurred largely because. Thus a change in M leaves V unaffected but brings a corresponding change in expenditure (MV) in the economy. They believe the expansion of the money supply will end recessions and boost growth. Write. Test. 30. Monetarism, a term first used by Brunner in 1968, can be understood in two ways. Monetarists argue that: The federal reserve system should allow the money supply to increase at a slow, steady annual rate The Friedman-phelps hypothesis claimed that the apparent trade-off between unemployment and inflation would not survive an extended period of: Monetarists say that income can vary in the short run, but the short run could be a long time and therefore make monetary policy ineffective, Keynesians argue that the LRAS is not necessarily inelastic they argue that the economy can be below full capacity for a long time. How to calculate velocity? Gravity. In 1979, Paul A. Volcker became chairman of the Fed and made fighting inflation its … Monetarists argue that, in the long run, changes in the money supply only cause inflation. ✓ Transactions demand for money has increased. Question 8 options: NEW! price and wage flexibility provided by competetive markets should cause fluctuations in aggregate demand to alter product resource prices rather than output and employment. Real output temporarily falls and the unemployment rate rises above natural rate. They see monetary policy as a stabilizing factor. Mainstream economists view the instability of ____ as the main cause of the economy's instability. Minimum wage law, pro-union legislation, guaranteed prices for certain farm products, pro-business monopoly legislation, Monetarist say the government has contributed to the economy's business cycles through, its clumsy and mistaken attempts to achieve greater stability through its monetary policies, Average number of times per year a dollar is spent on final goods and services, MV represents the total amount spent by purchasers of output, The dollar value of total spending has to equal. Related Study Materials. C) prices and wages are sticky in the short run. Keynes believed that monetary stimulus would be ineffective during a recession because of all of the following except. During periods of hyperinflation, money does not hold its value; therefore, people hold as little as possible for as short a time as possible. challenged the Keynesian view during the 1960s and 1970s. ADVERTISEMENTS: The Monetarists versus the Keynesians: There are conflicting views on the mechanism as to how money supply affects the general economic activities or income level. Monetarists argue that increasing the growth rate of the money supply will: In a fractional reserve banking system, money is created when: If the equilibrium level of real gdp per year is greater than the full-employment level of gdp, then; An increase in the required reserve ratio … In the real business cycle theory, if real output falls, the public. B) the velocity of money is predictable. The effectiveness of monetary policy is increased. C) The total demand for money equals the asset demand for money. Monetarist Theory: The monetarist theory is an economic concept which contends that changes in the money supply are the most significant determinants of the … C) prices and wages are sticky in the short run. Which of the following is true, according to monetarists? Which shift should occur if the Fed raises the discount rate? ✓ The demand for money is very sensitive to changes in the interest rate, but the investment demand is not. Monetarists claim that monetary policy is the real driver of the business cycle. In the sort run, ___ in either input or output prices will mean that, stickiness, any shock to either aggregate demand or aggregate supply will result in changes in output and employment.   What does an inappropriate decrease in the money supply lead to? The transactions demand for money is most closely associated with which of the following functions of money? Which of the following is true about monetary policy in the liquidity trap? An increase in the money supply directly increases AD. ✓ The aggregate demand curve should shift leftward, A decrease in aggregate demand could be caused by, If the Federal Reserve raises the discount rate, we would expect the. ✓ The equilibrium interest rate should decrease, and the equilibrium rate of investment should increase. Controversial part of the real business view, changes in the supply of money respond to changes in the demand for money, Real Business-Cyle-View, outcome after a decline in productivity reduces the economy's ability to produce real output. It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early […] For a time, higher prices cause firms to increase real output and the rate of unemployment falls below its natural rate. Related.   If the money desired to hold is less than the actual amount of money, the collective attempt to reduce cash balances... increases AD, and boosts nominal GDP. 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