Monetarism

Question 1

Who championed Monetarism?

Answer 1

Milton Friedman

Question 2

What are the four points of Monetarism?

Answer 2

1) Long-run monetary neutrality
This means that inflation takes place over time and it’s effects happen slow.
2) Short-run monetary non-neutrality
Understanding that inflation changes the price of money.
3) The distinction between real and nominal interest rates: Interest rates are manipulated by inflation
4) The role of monetary aggregates in policy analysis: Grow money evenly as possible, Friedman advocated 3-5% annually.

Question 3

What is the Quantity Theory of Money?

Answer 3

Change in relative supply of money is responsible for inflation.

Question 4

What is Monetarism’s relationship to fiscal and monetary policy?

Answer 4

Fiscal policy generally unwise, unstable and ineffective. Evenly grow the money supply to affect change. Make sure the Fed uses consistent rules regarding monetary policy and not their own discretion.

Question 5

What did Monetarists think about the Philip’s Curve?

Answer 5

Keynes was wrong about the Philip’s Curve. Created the Expectations Augmented Philip’s Curve that takes rational expectations into account.

Question 6

What are the two cores of Monetarism?

Answer 6

1. Inflation is always and everywhere a monetary phenomenon.

2. Monetary policy is more important and effective than fiscal at creating lasting change.