Which of the following is true, according to monetarists? ✓ Aggregate demand, prices, and nominal interest rates only. Mainstream economists view the instability of ____ as the main cause of the economy's instability. C) The total demand for money equals the asset demand for money. Monetarists like Milton Friedman blame the Depression on high-interest rates. Monetarism, a term first used by Brunner in 1968, can be understood in two ways. Real rates give a truer picture of the cost of money. 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. Factors altering velocity change gradually and predictably and that changes in velocity from one year to the next can be readily anticipated. • Monetarists argued that changes in the money supply can cause both inflation and economic instability. True (True Answer ) False 1256 Keynesian economics was mostly concerned with the short run. They believe the expansion of the money supply will end recessions and boost growth. B) The velocity of money increases as real GDP increases. ✓ Downward-sloping to the right because people wish to hold less money at higher interest rates and more money at lower interest rates. ✓ The equilibrium interest rate should decrease, and the equilibrium rate of investment should increase. Monetarists argue that, in the long run, changes in the money supply only cause inflation. Monetarists argue that changes in the money supply. 30. Monetarism, school of economic thought that maintains that the money supply (the total amount of money in an economy, in the form of coin, currency, and bank deposits) is the chief determinant on the demand side of short-run economic activity. Attempt History Attempt Time Score LATEST Attempt 1 83 minutes 5 out of 10 Score for this quiz: 5 out of 10 Submitted Mar 28 at 11:43am This attempt took 83 minutes. 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. B) The velocity of money increases as real GDP increases. B) Monetary Stimulus will be ineffective if firms' cost of production also rise.   Changes in money supply have a predictable affect on nominal GDP. Monetarists claim that monetary policy is the real driver of the business cycle. 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 . So the demand for money falls. D) Individuals hold idle balances for rational reasons. ✓ The investment demand curve is inelastic. Question 8 options:   ✓ The demand for money is very sensitive to changes in the interest rate, but the investment demand is not. Gravity. ✓ Reserve requirements or the discount rate, or through open market operations. Level of nominal GDP is 400 billion. Monetarists argue that changes in the money supply. Real output temporarily falls and the unemployment rate rises above natural rate. 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. Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation.Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Question 1 0 / 1 pts Which of the following tends to reduce the effect of an expansionary open market operation on the money supply? Why does an increase in the money supply cause inflation? Monetarists claim that monetary policy is the real driver of the business cycle. Related. D) it causes the value of the dollar to depreciate. In the LR, we always reach full employment. Question 8 options: D. changes in transfer payments. NEW! ✓ 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. Monetarists more likely to place emphasis on reducing inflation than keeping unemployment low. Find GCSE resources for every subject. needs less money to buy the reduced volume of goods and services. Investment. 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. Question 10 options: A) the crowding-out effect reduces investment. econ test 2; finals ; ADVERTISEMENTS: On the other hand, there are some who argue […] True False 112.In the monetarist view, the economy is inherently stable, but the mismanagement of monetary policy creates instability. The normal market demand curve for money is, ✓ A downward-sloping demand curve, where more money is held at lower interest rates. The monetarists argue that in the long run V is determined totally independently of the money supply (M). 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). Demonstrates short-run trade off between inflation and unemployment. They see monetary policy as a stabilizing factor. is to restore its desired balance of money relative to other items, such as stocks and bonds, factories and equipment, houses and automobiles, clothing and toys. Friedman argued that if the money supply were simply held steady, nations wouldn't suffer from depressions in the first place, and would thus have no need to rely on deflation or Keynesian policies to correct them. (supply side unemployment) Convergence of Keynesianism and Monetarism. STUDY. Monetarists stress the role of the natural rate of unemployment. At a higher nominal GDP, the money supply equals the amount of money desired, and the equilibrium is reestablished. Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation.Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. True False 112.In the monetarist view, the economy is inherently stable, but the mismanagement of monetary policy creates instability. Under conditions of full employment, that rise in AD raises the price level. ✓ The equilibrium output will increase but the price level will stay the same until full employment is reached. In the real business cycle theory, if real output falls, the public. *The market system … ✓ Monetary policy will be unable to reduce interest rates further to stimulate investment. What does an inappropriate decrease in the money supply lead to?   They also tend to watch real interest rates rather than nominal rates. 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. What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed decreases the discount rate? So no matter what happens to prices (inflation), we will end up at full-employment. asked Aug 19, 2019 in Economics by pampam015. Which shift should occur if the Fed raises the discount rate? The transactions demand for money is most closely associated with which of the following functions of money? Test. 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. ✓ Aggregate spending, real output, and real interest rates, with possible effects on prices and nominal interest rates. 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. C) prices and wages are sticky in the short run. Monetarists argue that fiscal policy is ineffective because. On the one hand, some theorists put the emphasis on a direct relation between the money supply and expenditure. caroloopa. Start studying 104. Significant increases in investment spending are multiplied into even greater increases in aggregate demand and thus can produce demand pull inflation. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Which of the following is most likely to occur if the Fed pursues expansionary monetary policy? Keynes believed that monetary stimulus would be ineffective during a recession because of all of the following except. Thus a change in M leaves V unaffected but brings a corresponding change in expenditure (MV) in the economy. Assume the aggregate supply curve is horizontal and the economy is experiencing a recession. Related Study Materials. However, most Monetarists (e.g. ✓ Transactions demand for money has increased. During periods of hyperinflation, money does not hold its value; therefore, people hold as little as possible for as short a time as possible. Monetarists believe that the Great Depression occurred largely because. 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. Which of the following is true, according to monetarists? However, over the LR, it is possible. C) Long term Aggregate Supply will be vertical at Natural Rate of Unemployment. wide booms and busts. Monetarists argue that fiscal policy is ineffective because. econ test 2; finals ; Friedman, 1959, 1962, 1985; Brunner, 1981) nonetheless insist that this is the "risk-minimizing" strategy in view of the lag problem and the political incentives problem. The fed allowed the money supply to fall by roughly one-third during that period. True False 111.Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability. Monetarists argue that money supply growth is an important part of managing fluctuations in the business cycle. This description implies that the. Monetarists. D )All of above. The effectiveness of monetary policy is increased. (supply side unemployment) Convergence of Keynesianism and Monetarism. Which of the following is likely to cause monetary restraint to be effective? Business cycles are caused by real factors that affect aggregate supply rather than by monetary or spending, factors that cause fluctuations in aggregate demand. They believe the expansion of the money supply will end recessions and boost growth. B) the velocity of money is predictable. Created by. downward wage inflexibility through the minimum wage law, pro-union legislation, guaranteed prices for certain farm products, pro-business monopoly legislation, ect.   ADVERTISEMENTS: On the other hand, there are some who argue […] It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early […] The speculative, transactions, and precautionary demands for money added together give the. Spell. How to calculate velocity? To monetarists, the best thing for the economy is to keep an eye on the money supply and let the market take care of itself. Ceteris paribus, if the Fed sells bonds through open market operations, the money. Which of the following increases the effectiveness of monetary policy from a monetarist perspective? C) prices and wages are sticky in the short run. C) Long term Aggregate Supply will be vertical at Natural Rate of Unemployment. 10 Monetarists argue that: A) Increase in Money Supply is likely to lead to inflation only. A) Changes in the money supply have no effect on real variables. Monetarists … The distinction between Keynesian and monetarists positions is a bit more blurred. Monetarists like Milton Friedman blame the Depression on high-interest rates. Monetarists say that central banks are more powerful than the government because they control the money supply. ✓ Because businesses may be able to borrow from foreign banks at cheaper rates. The market system would provide substantial macroeconomic stability... were it not for government interference in the economy, Monetarists see that the government has promoted. Question 10 options: A) the crowding-out effect reduces investment. Third modern view of the cause of macroeconomic instability. 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. Flashcards. Which of the following is true about monetary policy in the liquidity trap? responses, while Friedman and other monetarists argued convincingly that the high rates of inflation were due to rapid increases in the money supply, making control of the money supply the key to good policy. 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? How has the government promoted wage inflexibility? Monetarists stress the role of the natural rate of unemployment. 37. (second source of macro instability along with demand side). Learn. 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? Answer: View Answer 11) Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor. On the one hand, some theorists put the emphasis on a direct relation between the money supply and expenditure. Monetarists, however, argue that increasing or decreasing the supply of money in the short run can have significant effects on output and employment. Key Concepts: Terms in this set (11) Monetarists theory. 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 … Friedman then went on to make a more direct argument against Keynesian policy. they are... An increase in M increases P or Q, or some combination of the both, a decrease in M reduces P or Q, or some combination, In the Equation of Exchange, nominal GDP is equal to, Monetarists say that ____ is the single most important cause of macroeconomic instability, Monetary policy causes macroeconomic instability, explain what a increase in the money supply does. https://quizlet.com/136305838/chapter-15-monetary-policy-flash-cards 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. Shorter pay periods, widespread use of credit cards, faster means of making payments enable people to hold less money and to turn it over more rapidly than was possible in earlier times. price and wage flexibility provided by competetive markets should cause fluctuations in aggregate demand to alter product resource prices rather than output and employment. A) Changes in the money supply have no effect on real variables. B) the velocity of money is predictable. ✓ People behave rationally and borrow less when interest rates rise. True (True Answer ) False 1257 Keynesian theory argued that monetary policy could be very effective during a depression. Eventually, nominal wages fall and real output returns to its full employment level. SR relationship with inflation and unemployment vs LR, SR- Inverse relationship, Higher inflation goes with lower unemployment. Which of the following is a monetarist assumption that plays a key role in explaining the ineffectiveness of fiscal policy? 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. Which of the following is true about the equilibrium rate of interest? C) The total demand for money equals the asset demand for money. 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. Monetarist Theory: The monetarist theory is an economic concept which contends that changes in the money supply are the most significant determinants of the … Related Study Materials. END RESULT. 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. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. D) Individuals hold idle balances for rational reasons. 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 more likely to place emphasis on reducing inflation than keeping unemployment low. Monetarism is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth. Why does an increase in the money supply cause inflation? price and wage flexibility provided by competetive markets should cause fluctuations in aggregate demand to alter product resource prices rather than output and employment. For a time, higher prices cause firms to increase real output and the rate of unemployment falls below its natural rate. The distinction between Keynesian and monetarists positions is a bit more blurred. Match. ✓ Reduce interest rates and increase aggregate demand. A monetary stimulus is designed to shift the, According to Bernanke's policy guide, a 1/4 point decrease in long-term interest rates results in a. In 1979, Paul A. Volcker became chairman of the Fed and made fighting inflation its … 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. 10 Monetarists argue that: A) Increase in Money Supply is likely to lead to inflation only. Such policy was unstable and harmful, he argued. According to extreme monetarists, monetary policy affects. ✓ The money supply increases, interest rates decrease, investment increases, and AD increases. Related. B) Monetary Stimulus will be ineffective if firms' cost of production also rise. According the mainstream view, what are 2 sources that instability in the economy arises from? B. ups and downs in the growth of the money supply. 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. The public desires 100 billion of money to purchase that output. Monetarists argue that, in the long run, changes in the money supply only cause inflation. challenged the Keynesian view during the 1960s and 1970s. Most published rates are nominal rates, while real rates remove the effects of inflation. ✓ The willingness of consumers to increase consumption when interest rates fall. 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