The Monetarists Propositions III. Monetarists wish to take much of the discretionary power out of the hands of the Fed so they cannot destabilize the economy. 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. Keynesians believe that velocity is inherently unstable and they do not 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. 28. Monetarists believe that capitalist markets are highly competitive and that this competition makes the economy very stable. B. unstable and the public sector should be large. A. Monetarists believe that the economy is inherently unstable. Although differences remain, the debate between Keynesians and Monetarists cooled considerably in the 1990s. An increase in money supply would lead to an increase in liquidity. The theory based on the They recommend active government policy to respond to inflationary and recessionary gaps. Monetarists believe that the money demand and Investment demand links are much stronger than Keynesians believed. MONETARISTS BELIEVE THE PRIVATE ECONOMY IS INHERENTLY A. UNSTABLE AND THE PUBLIC SECTOR SHOULD BE LARGE B. Keynesians generally believe that real economy mainly based on issuers like reduced labour demand or fiscal policies of Government (Anderton, 2009). . The theory of portfolio balances says that every individual has a particular optimum mix of assets. over longer periods. The Equation of Exchange states that M x V = P x Y. C. stable, but that the public sector should be large. Monetarists believe that the economy operates under the classical range (vertical LM curve). Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. STABLE AND THE GOVERNMENT SECTOR SHOULD BE SMALL C. UNSTABLE AND THE PUBLIC SECTOR SHOULD 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. General view of the economy: The foundation of monetarism is the Quantity Theory of Money. ii. The private sector of the economy is inherently stable. Monetarists believe the private economy is inherently A. unstable and the public sector should be small. [text: E p. 738 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 IV. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. B. unstable and the public sector should be large. Therefore, they argue that there is no need for Government intervention in the economy. Monetarists believe monetary policy is more effective in influencing economic activity. D. stable and that the government sector should be. Keynesians believe that the key to economic output is demand for products and services. Some monetarists believe that the velocity’s unexpected behaviour in recent years has to do with problems of definition or measurement. As a result they support government intervention to assist in stabilizing the economy. stabilizing the economy. 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. Fine-tuning of the economy would not be necessary. 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 Prices and wages fluctuate to equilibrate the economy at a level of full employment. 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. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. 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.­ 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. The IS curve normally slopes downward. C. Although monetarists are basically non-interventionist, they are in favor of activist monetary 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. The money’s demand Keynesians view the economy as inherently unstable and blame inadequate demand for periods of stagnation. 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 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. Monetarists believe the private economy is inherently: answer stable and that the government sector should be small. C. stable, but that the public sector should be large. In the short run, the supply of money influences real variables. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. 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. It reflects a greater effect on economic growth of the population, inflation recession. • Keynesians start at this proposed money growth rule. 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. B. Monetarists believe that policy activism is one of the principal causes of economic instability. 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. Money is not only as a means of payment, but it also becomes a commodity to be transacted. 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. b. Money is the dominant factor causing cyclical movements in output and employment. Long-run aggregate supply de-creases so that the long-run aggregate supply curve shifts from LAS0 curve to LAS1. If a feed-back rule that targets real GDP is in place, A) the economy neverA. Keynesians believe in the use of macroeconomic tools to stabilise the economy whereas the others do not. Monetarists believe that monetary policy is more effective than fiscal policy in eliminating unemployment, whereas Keynesians believe the opposite. economy. Money has a significant role to play in the modern economy. 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 a private market economy is inherently stable and if left free will automatically adjust itself to full-employment level of output. Monetarists believe the private economy is inherently: A. unstable and the public sector should be small. Followers of Keynesian economics contend that monetarism fails as an adequate explanation of the economy because V is inherently unstable, and attach virtually no 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. Monetarists believe that the economy is inherently stable. . Therefore, laissez-faire is often the best policy. 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monetarists believe that the economy is inherently

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