Economics (MindTap Course List)
13th Edition
ISBN: 9781337617383
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 14, Problem 4WNG
(a)
To determine
The
(b)
To determine
The
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Students have asked these similar questions
True or False? In an assigned reading, Milton
Friedman indicated that he agreed with John
Maynard Keynes's explanation of the causes of
the Great Depression.
True
False
As discussed in class, which of the following was
argued by monetarists of the 1970s?
in a free market economy, central banks
can never effectively manipulate money
supply, because lending activity is subject
to rapid changes
an expansion of the money supply that is
less than the growth of output during the
same period will generally result in
deflation
O effects of changes in money supply are
seen in output before they are seen in
prices
central banks should focus on minimizing
the legal interest rates paid to depositors,
as ensuring the safety of banks was the
most important goal
a) Creating additional money will increase money supply. What will happen to price level? Which theory did you use to answer the question? Explain the theory.
b) According to Monetarism, when does an increase in money supply change both Real GDP and price level? In the short run or in the long run? Explain your answer using a diagram.
c) According to Monetarism, when does an increase in money supply change only price level and not Real GDP? In the short run or in the long run? Explain your answer using a diagram.
In one version of the monetarist model, we said that the velocity of money, V, is treated as constant (as an approximation of reality). Also, recall that we said monetarists assume that the short-run Aggregate Supply curve is upward sloping (i.e., real GDP, Q, is not fixed in the short run), but the Long-run Aggregate Supply curve is vertical (as in our self-regulating model). Consider the equation of exchange,
MV≡PQ
An increase in government spending would
Group of answer choices
A) cause a recession.
B) increase real GDP in the long run, but not the short run.
C) cause inflation in the short run.
D) not increase real GDP in the short or long run because there would be complete crowding out.
E) increase real GDP in the short run, but not the long run.
Chapter 14 Solutions
Economics (MindTap Course List)
Ch. 14.1 - Prob. 1STCh. 14.1 - Prob. 2STCh. 14.1 - Prob. 3STCh. 14.2 - Prob. 1STCh. 14.2 - Prob. 2STCh. 14.3 - Prob. 1STCh. 14.3 - Prob. 2STCh. 14.3 - Prob. 3STCh. 14.4 - Prob. 1STCh. 14.4 - Prob. 2ST
Ch. 14.4 - Prob. 3STCh. 14 - Prob. 1QPCh. 14 - Prob. 2QPCh. 14 - Prob. 3QPCh. 14 - Prob. 4QPCh. 14 - Prob. 5QPCh. 14 - Prob. 6QPCh. 14 - Prob. 7QPCh. 14 - Prob. 8QPCh. 14 - Prob. 9QPCh. 14 - Prob. 10QPCh. 14 - Prob. 11QPCh. 14 - Prob. 12QPCh. 14 - Prob. 13QPCh. 14 - Prob. 14QPCh. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - Prob. 17QPCh. 14 - Prob. 18QPCh. 14 - Prob. 19QPCh. 14 - Prob. 1WNGCh. 14 - Prob. 2WNGCh. 14 - Prob. 3WNGCh. 14 - Prob. 4WNGCh. 14 - Prob. 5WNGCh. 14 - Prob. 6WNGCh. 14 - Prob. 7WNGCh. 14 - Prob. 8WNG
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- a) According to Monetarism, when does an increase in money supply change both Real GDP and price level? In the short run or in the long run? Explain your answer using a diagram. b) According to Monetarism, when does an increase in money supply change only price level and not Real GDP? In the short run or in the long run? Explain your answer using a diagram.arrow_forwardIn one version of the monetarist model, we said that the velocity of money, V, is treated as constant (as an approximation of reality). Also, recall that we said monetarists assume that the short-run Aggregate Supply curve is upward sloping (i.e., real GDP, Q, is not fixed in the short run), but the Long-run Aggregate Supply curve is vertical (as in our self-regulating model). Consider the equation of exchange, MV≡PQ (with V treated as fixed). Under the assumptions in this question, Group of answer choices A) none of the other options. B) if the money supply (M) were to increase by x%, the aggregate price level (P) would increase by x%. C) if the money supply (M) were to increase by x%, real GDP would increase by x%. D) if the money supply (M) were to increase by x%, the aggregate price level (P) would increase by more than x%. E) if the money supply (M) were to increase by x%, nominal GDP would increase by x%.arrow_forwardMilton Friedman, the leader for Monetarism had proposed several important arguments regarding the implementation of Monetary Policy. The arguments were listed as: Proposition 1: Monetary Policy has powerful short-run effects on the real economy. In the long run, however, changes in the money supply have their primary effect on the price level. Proposition 2: Despite the powerful short-run effect of money on the economy, there is little scope for using Monetary Policy actively to try to smooth business cycle. Proposition 3: Even if there is some scope for using Monetary Policy to smooth business cycles, the Central Bank (the Federal Reserve) cannot be relied on to do so effectively. Proposition 4: The Central Bank (the Federal Reserve) should choose a specific monetary aggregate (such as M1 or M2) and commit itself to making that aggregate grow at a fixed percentage rate, year in and year out. Keynesians economists’ response to the above propositions with this statement: “Monetary…arrow_forward
- What do monetarists predict will happen in the short run and in the long run as a result of each of the following? (In each case, assume the economy is currently in long-run equilibrium).(a) Velocity rises. (b) Velocity falls.(c) The money supply rises. (d) The money supply falls.arrow_forwardPRICE LEVEL Show the long-run effect of this change according to the monetarist view, ceteris paribus, by dragging one or both curves on the graph below. (?) REAL GDP AD SRAS AD SRASarrow_forwardWhich of the following is consistent with the monetarist view? Select one: A. A reduction in taxes will leave the value of real output unaffected B. Interest rates may be affected by increases in G or reductions in T C. Changes in M may cause changes in P in the long run. D. Monetary policy should be used to correct a shortfall in real outputarrow_forward
- Do Monetarists and Keynesians believe that inflation is always and everywhere a monetary phenomenon? Explain your position with the aid of diagram(s).arrow_forwardThe natural rate of unemployment (NRU) is the long-run equilibrium rate of unemployment within the monetarist macroeconomic model. The NRU depends on which of the following? (a) The structure of the economy and in particular the level of aggregate supply; (b) The structure of the economy and in particular the level of aggregate demand; (c) The structure of the economy and in particular the institutions within it; (d) The structure of the economy and in particular the price of oil.arrow_forwardWhich of the following is a position held by monetarists? Changes in the velocity of money are unpredictable. Aggregate demand depends on money velocity but not on the money supply. The economy is unstable; wages and prices are inflexible. The short-run aggregate supply curve slopes upward. Initially, the economy is in long-term equilibrium. Suppose there is an increase in velocity-that is, there is an increase in the average number of times a dollar is spent to buy goods and services. Show the long-run effect of this change according to the monetarist view, ceteris paribus, by dragging one or both curves on the graph below. PRICE LEVEL REAL GDP SRAS AD AD SRASarrow_forward
- Monetarists differ from Classical economists in their view of money in that monetarists believe: (a) The velocity of money is relatively constant over time (b) Prices are not influenced by real GDP (c) Prices are not influenced by the money supply (d) The level of unemployment is directly related to the money supply (e) The velocity of money varies over timearrow_forwardSuppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively. What is the velocity of money? How will households and businesses react if the central bank reduces the money supply by $20 billion? By how much will nominal GDP have to fall to restore equilibrium, according to the monetarist perspective?arrow_forwardSuppose that the money supply and the nominal GDP are 100 billion and 500 billion respectively. If the central bank reducess the money supply by 10 billion, by how much will nominal GDP have to fall to restore equilibrium, according to the monetarist perspective.arrow_forward
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