The Monetarists Propositions III. The theory based on the Monetarism gained prominence in the 1970s—bringing down inflation in the United States and United Kingdom—and greatly influenced the US central bank’s decision to stimulate the economy during the global recession of 2007–09. Monetarists believe the private economy is inherently: A. unstable and the public sector should be small. Because Monetarists believe that the economy is inherently stable, they tend to view the Aggregate Supply curve as more vertical so discretionary stabilization policy is not as important. STABLE AND THE GOVERNMENT SECTOR SHOULD BE SMALL C. UNSTABLE AND THE PUBLIC SECTOR SHOULD The IS curve normally slopes downward. In the short run, the supply of money influences real variables. economy. [text: E p. 738 Simply speaking, M 1 and the gross national product are not what they used to be arid because velocity equals GNP divided by M 1 , changes in the numerator and denominator can make a big difference. It is an inflationary situation when prices, income level, rate of interest and velocity of money are very high and speculative demand for money is at a minimum. Solution for a)Keynesian economists believe that the business cycle is caused by external factors, such as government interference in the economy b)classical… Social Science Monetarism gained prominence in the 1970s—bringing down inflation in the United States and United Kingdom—and greatly influenced the U.S. central bank’s decision to stimulate the economy during the global recession of 2007–09.­ It reflects a greater effect on economic growth of the population, inflation recession. Monetarists believe that capitalist markets are highly competitive and that this competition makes the economy very stable. Monetarism gained prominence in the 1970s—bringing down inflation in the United States and United Kingdom—and greatly influenced the US central bank’s decision to stimulate the economy during the global recession of 2007–09. A. Monetarists believe that the economy is inherently unstable. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. D. stable and that the government sector should be. Monetarists believe that the economy is more stable when active fiscal and monetary policy are used According to monetarists changes in the money supply are the primary cause of changes in the price level The basic equation of monetarism is MV = PQ Monetarists believe that if the money supply is held to a stable growth rate, one comparable to the rate of growth of potential GDP, then: a. Monetarists believe the private economy is inherently: answer stable and that the government sector should be small. As a result they support government intervention to assist in stabilizing the economy. Monetarism gained prominence in the 1970s—bringing down inflation in the United States and United Kingdom—and greatly influenced the U.S. central bank’s decision to stimulate the economy during the global recession of 2007–09. Money is the dominant factor causing cyclical movements in output and employment. Monetarists believe that the money demand and Investment demand links are much stronger than Keynesians believed. Long-run aggregate supply de-creases so that the long-run aggregate supply curve shifts from LAS0 curve to LAS1. Monetarists are less convinced of the usefulness of fiscal policy. Keynesians view the economy as inherently unstable and blame inadequate demand for periods of stagnation. IV. Keynesians generally believe that real economy mainly based on issuers like reduced labour demand or fiscal policies of Government (Anderton, 2009). Followers of Keynesian economics contend that monetarism fails as an adequate explanation of the economy because V is inherently unstable, and attach virtually no B. unstable and the public sector should be large. They recommend active government policy to respond to inflationary and recessionary gaps. stabilizing the economy. Keynesians believe that velocity is inherently unstable and they do not Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. Keynesians believe that the capitalist economy is inherently unstable and that business cycle fluctuations could lead to periodic inflation or unemployment. As a general rule, because Monetarists believe that the economy is inherently stable and self-correcting - a drop in aggregate demand does not necessitate the need for government policy (as it Monetarists believe that monetary policy is more effective than fiscal policy in eliminating unemployment, whereas Keynesians believe the opposite. b. Moreover, the Federal Reserve should follow fixed rules in conducting monetary policy. • Keynesians start at this proposed money growth rule. The theory of portfolio balances says that every individual has a particular optimum mix of assets. C. Although monetarists are basically non-interventionist, they are in favor of activist monetary The Equation of Exchange states that M x V = P x Y. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. Instability in the General view of the economy: The foundation of monetarism is the Quantity Theory of Money. C. stable, but that the public sector should be large. . Monetarists wish to take much of the discretionary power out of the hands of the Fed so they cannot destabilize the economy. As well as asserting the destabilising nature of discretionary monetary policy, the . 28) In the above figure, suppose the economy is ini-tially at point A. Prices and wages fluctuate to equilibrate the economy at a level of full employment. ii. 28. Money has a significant role to play in the modern economy. Mission Statement: Monetarists believe that business cycle fluctuations are best countered by appropriate monetary policy. To monetarists, the precise rate is not as crucial as its constancy, for the theoretical validity of a monetary rule stems from the principle that the economy is basically stable. Monetarists believe that the economy is inherently stable. Keynesians believe in the use of macroeconomic tools to stabilise the economy whereas the others do not. To sum up, Friedman and the Monetarists believe that the economy is inherently stable - that is to say, the economy always returns to its long-run equilibrium at the natural rate of unemployment. B. unstable and the public sector should be large. Monetarists believe the private economy is inherently A. unstable and the public sector should be small. If a feed-back rule that targets real GDP is in place, A) the economy neverA. 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. Like classical economists, monetarists also believe that free- market economy is inherently stable and if the economy departs from the state of full- employment, full- employment equilibrium is restored through automatic adjustments in it. Therefore, they argue that there is no need for Government intervention in the economy. The private sector of the economy is inherently stable. Although differences remain, the debate between Keynesians and Monetarists cooled considerably in the 1990s. B. Monetarists believe that policy activism is one of the principal causes of economic instability. The Economy is naturally stable, unless disturbed by erratic monetary shocks In line with the monetarist school, Rationalists believe that the economy is inherently stable, unless disturbed by erratic monetary growth, and that when subjected to some 5. MONETARISTS BELIEVE THE PRIVATE ECONOMY IS INHERENTLY A. UNSTABLE AND THE PUBLIC SECTOR SHOULD BE LARGE B. Fine-tuning of the economy would not be necessary. Therefore, laissez-faire is often the best policy. C. stable, but that the public sector should be large. The money’s demand Money is not only as a means of payment, but it also becomes a commodity to be transacted. Monetarists believe that a private market economy is inherently stable and if left free will automatically adjust itself to full-employment level of output. Monetarists believe that the economy operates under the classical range (vertical LM curve) so that only monetary policy (i.e., changes in the LM curve) can affect the level of income, output and employment. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. over longer periods. Monetarists believe that the economy operates under the classical range (vertical LM curve). Monetarists believe monetary policy is more effective in influencing economic activity. Some monetarists believe that the velocity’s unexpected behaviour in recent years has to do with problems of definition or measurement. Keynesians believe that the key to economic output is demand for products and services. An increase in money supply would lead to an increase in liquidity. 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