Chapter 17: Quiz Answers -- Monetarism

  1. Monetarism is
    a school of thought that stresses the important role of the money supply. This school of thought may be less influential than it was in the 1970s (although certainly not defunct), but its diminished role is partly because many of its propositions have been incorporated into mainstream Keynesian economics.

  2. Velocity is best defined as
    the average number of times that a dollar turns over on the purchase of final goods and services in a year. Note that velocity is not exactly the same as the average number of times that a dollar turns over on transactions in a given year.

  3. Which of the following is not a belief of monetarists?
    In the short-run, Fiscal policy is a better instrument of stabilization policy than monetary policy. Monetarists have little confidence in fiscal policy to stabilize the economy partly because of the long implementation lags involved. Although monetarists would prefer the Fed to be bound by rules most of the time, they believe that central bankers can conduct better stabilization policy than the government.

  4. If the money supply is $300 and velocity is 4, then nominal GDP is
    $1,200. M x V = P x Y, so $300 x 4 = $1,200.

  5. Which statement regarding the rules vs. discretion debate is true?
    Monetarists wish to bound the Fed to a money growth rule because they feel that the Fed could destabilize the economy if it has discretion over its actions. Because of the uncertainty about the state of the business cycle and the impact that monetary policy has on the economy, Monetarists believe that the Fed would do better by following preset rules.

  6. Monetarism has partly fallen out of favor in academic circles mainly because
    The velocity of money has been unstable over the past several years. The short-run predictions of Monetarism depend critically on stable velocity. Since the early 1980s, velocity has been unstable and unpredictable, rendering Monetarist policy prescriptions unreliable.

  7. If the economy's Aggregate Supply curve is perfectly vertical, then an increase in the money supply
    all of the above. An increase in the money supply shifts the Aggregate Demand curve to the right; however, output does not change if the Aggregate Supply curve is vertical. The full impact of the money supply increase is in a price level increase.

  8. If the money supply grows at 4 percent per year, a monetarist would predict that in the short run
    nominal GDP will grow at 4 percent per year. Given a constant value for velocity, the rate of growth of nominal GDP (P x Y) is equal to the rate of growth of the money supply. In the short run, Monetarists do not attempt to explain whether the impact will be more on prices (P) or output (Y).

  9. The assumption that is needed to transform the equation of exchange into the quantity theory of money is that velocity is stable in the short run.
    True. Without this assumption, the equation of exchange remains an identity, true by definition.

  10. A Keynesian believes that the equation of exchange is valid.
    True. As mentioned above, the equation of exchange remains an identity, true by definition, no matter the economic school of thought.

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