Monetarist Economics

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What is crucial for stability in the economy according to monetarists?

Rule for the growth rate in nominal income
Stability in the growth of the money stock (correct)
Fiscal policy
Discretion of policymakers

What is the main characteristic of a constant growth rate rule as proposed by M Friedman?

It is a flexible rule
It is based on fiscal policy
It is a fixed rate of growth (correct)
It is based on discretion of policymakers

What is the effect of fiscal policy on real or nominal income according to monetarists?

It is unpredictable
It has no effect
It has a significant effect
It has a little systematic effect (correct)

What is the Cambridge equation of exchange in the Monetarist Model?

Md = kPY (C) Signup and view all the answers

What is the assumption about the proportion of nominal income held as cash in the Cambridge equation?

It is constant (C) Signup and view all the answers

What is the alternative form of the Cambridge equation in terms of nominal income?

MV = PY (A) Signup and view all the answers

What is the primary factor that determines how much is held as cash and how much as bonds according to Keynes?

The interest rate (B) Signup and view all the answers

What happens to the speculative demand for money when the interest rate rises?

It decreases (C) Signup and view all the answers

What is the main criticism of the Monetarists about Keynes' theory?

Keynes' assumption about the homogenous category of bonds (A) Signup and view all the answers

What is the rate of return on equities or company shares known as?

Dividends plus capital gains (C) Signup and view all the answers

What happens to the demand for money when any one of the three types of r increases according to the Monetarists?

It decreases (A) Signup and view all the answers

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 (C) Signup and view all the answers

What is the primary factor that determines nominal income according to the Cambridge equation?

The money supply (C) Signup and view all the answers

What is assumed to have little effect on the demand for money according to the Monetarist view?

The factors rB, rE, and rD (C) Signup and view all the answers

What is the shape of the LM curve in the Monetarist model?

Very inelastic (C) Signup and view all the answers

What is the shape of the IS curve in the Monetarist model?

Gentle slope (D) Signup and view all the answers

What is the difference between the Monetarist model and the Keynesian model?

The Monetarist model assumes a more inelastic LM curve (D) Signup and view all the answers

What is assumed to be constant in the Cambridge equation?

The parameter k (B) Signup and view all the answers

What is the primary purpose of the Taylor rule in monetary policy?

To respond to deviations in output and inflation from their targets (B) Signup and view all the answers

What is the target rate of inflation implied in the Taylor rule?

2% (D) Signup and view all the answers

What is the variable 'y' representing in the Taylor rule?

The percentage deviation of output from full-employment output (A) Signup and view all the answers

What is the real Fed fund rate, according to the Taylor rule?

i - ∏ (D) Signup and view all the answers

What is the author of the Taylor rule, which is a monetary policy rule that takes into account economic conditions?

John Taylor (A) Signup and view all the answers

What happens to the price of bonds when the price of stock equity goes up?

The price of bonds tends to go down (B) Signup and view all the answers

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 (D) Signup and view all the answers

What is the formula for the Monetarist theory of money demand?

Md = k (rB, rE, rD)PY (C) Signup and view all the answers

What happens to k when there is an increase in any of the rates of return (rB, rE, rD)?

k decreases (C) Signup and view all the answers

What is the condition for equilibrium in the money market according to the Monetarists?

Ms = Md = k (rB, rE, rD)PY (D) Signup and view all the answers

What would happen to k if there is an increase in the money supply, according to the Monetarists?

k would increase (A) Signup and view all the answers

Monetarists' View on Economic Stability

Stability in the growth of the money stock is essential for a stable economy, according to monetarists.

Constant Growth Rate Rule

A constant growth rate rule, as proposed by Milton Friedman, maintains a fixed rate of growth in the money supply.

Fiscal Policy's Impact (Monetarist View)

Monetarists believe that fiscal policy has minimal systematic effects on either real or nominal income.

Cambridge Equation of Exchange

The Cambridge equation of exchange in the Monetarist Model is Md = kPY, where Md is the demand for money, k is a constant proportion of nominal income held as cash, P is the price level, and Y is real income.