Monetarism and Goodhard

Question 1

What is the quantity theory of money?

And what does it imply?

Answer 1

Py = MV

It implies a direct relationship between price changes and money supply changes in the economy.

Question 2

What is Monetarism?

And what assumptions does it make?

Answer 2

Follows from the quantity theory of money.

Money supply acts as a nominal anchor, with growth in M fixing the inflation rate.

Question 3

What is Goodhart’s Law?

Answer 3

When the central back picks a monetary aggregate (e.g. M0, M1 etc) as a target, the financial system responds by choosing a close substitute. This undermines the aggregate.

Question 4

Why doesn’t monetarism work?

Answer 4

Changes in money demand alter the relationship between money supply and inflation. Therefore, monetary targeting cannot control AD.

Question 5

How does the Phillips curve alter the IS curve?

Answer 5

If the Phillips Curve is steeper, meaning inflation is more responsive to y, then a will be larger.