Chicago School

Question 1

School main ideas

Answer 1

1. Rejection Keynesianism
2. Limited government
3. Preserve Fisher’s monetary views

Question 2

Friedman

Answer 2

1. Consumption function:
   Permanent income determines consumption. Consumption does not respond to transitory income shocks so fiscal policy less effective.
2. Demand for money: Total wealth, Cost of holding money (interest rate, expected inflation, price level), Preferences
3. Quantity theory of money: Demand for money stable in the SR. If money supply increases →increases
   demand for goods →increase in prices →increase in demand for money→
   equilibrium.
4. “Monetary policy is responsible for causing the Great Depression”
5. Monetary rule: “Increase the money supply annually at a steady
   rate roughly corresponding to the long-run rate of growth of capacity to avoid
   the risk of high inflation or recession”