Chapter 12 part A Flashcards
Define monetary transmission mechanisms.
Changes in monetary aggregates and how they are linked to demand, output, employment and inflation.
What causes the changes in monetary aggregates in a floating exchange rate system?
- Changes in the official rate at which the central bank finances shortage of liquidity in the money market
- A change in the money supply
- Changes in the credit extension regulations or direct controls
Why were there major developments in macro economic and monetary theory from the 1970s?
Most of the larger and developing countries were experiencing stagflation.
How was the existing theory flawed?
It was unable to explain these events(stagflation) and also had not predicted such an outcome.
Why was the new classical economics emerged as a school of macroeconomics?
To reconcile macroeconomic analysis with microeconomic foundations.
What view was the New Classical theory against?
The view that expansionary demand-side policies generated lasting reductions in unemployment, at the cost of a high but stable inflation.
What was the idea of stable inflation based on?
- The Phillips Curve
- The expectation augmented Phillips curve
What do the new classical economists believe?
-They believed that the natural rate of unemployment was determined by structural factors in the economy
-Any attempts to lower unemployment through demand-side policies would only lead to higher inflation
What was the new classical theory built on?
On the assumption of flexible wages and prices which according to them results in continuous market clearing
When does market clearing occur?
When demand and supply are equal such that there is no excess demand or supply.
