29 Questions
What is crucial for stability in the economy according to monetarists?
Stability in the growth of the money stock
What is the main characteristic of a constant growth rate rule as proposed by M Friedman?
It is a fixed rate of growth
What is the effect of fiscal policy on real or nominal income according to monetarists?
It has a little systematic effect
What is the Cambridge equation of exchange in the Monetarist Model?
Md = kPY
What is the assumption about the proportion of nominal income held as cash in the Cambridge equation?
It is constant
What is the alternative form of the Cambridge equation in terms of nominal income?
MV = PY
What is the primary factor that determines how much is held as cash and how much as bonds according to Keynes?
The interest rate
What happens to the speculative demand for money when the interest rate rises?
It decreases
What is the main criticism of the Monetarists about Keynes' theory?
Keynes' assumption about the homogenous category of bonds
What is the rate of return on equities or company shares known as?
Dividends plus capital gains
What happens to the demand for money when any one of the three types of r increases according to the Monetarists?
It decreases
What is the effect of an increase in any one of the three types of r on k according to the Monetarists?
It keeps k stable
What is the primary factor that determines nominal income according to the Cambridge equation?
The money supply
What is assumed to have little effect on the demand for money according to the Monetarist view?
The factors rB, rE, and rD
What is the shape of the LM curve in the Monetarist model?
Very inelastic
What is the shape of the IS curve in the Monetarist model?
Gentle slope
What is the difference between the Monetarist model and the Keynesian model?
The Monetarist model assumes a more inelastic LM curve
What is assumed to be constant in the Cambridge equation?
The parameter k
What is the primary purpose of the Taylor rule in monetary policy?
To respond to deviations in output and inflation from their targets
What is the target rate of inflation implied in the Taylor rule?
2%
What is the variable 'y' representing in the Taylor rule?
The percentage deviation of output from full-employment output
What is the real Fed fund rate, according to the Taylor rule?
i - ∏
What is the author of the Taylor rule, which is a monetary policy rule that takes into account economic conditions?
John Taylor
What happens to the price of bonds when the price of stock equity goes up?
The price of bonds tends to go down
What is the main difference between Keynes' and Monetarists' view on demand for money?
Keynes believes demand for money is unstable, while Monetarists believe it is stable
What is the formula for the Monetarist theory of money demand?
Md = k (rB, rE, rD)PY
What happens to k when there is an increase in any of the rates of return (rB, rE, rD)?
k decreases
What is the condition for equilibrium in the money market according to the Monetarists?
Ms = Md = k (rB, rE, rD)PY
What would happen to k if there is an increase in the money supply, according to the Monetarists?
k would increase
Test your understanding of monetarist economics, including the importance of stability in the growth of the money stock, the role of rules versus discretion in policymaking, and the effectiveness of fiscal policy as a stabilization tool.
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