Return to Classical/Old Monetarist

Question 1

How good is any sort of policy?

Answer 1

Both fiscal and monetary policy are useless because they only change nominal values and not actual production.

Question 2

Summary of Old Monetarist Model (2.5 things)

Answer 2

(1&2) Economy anchored at full employ, resulting in vertical Phillips curve. (3) Quantity theory of money: Increase in the money supply will cause inflation if there is not equal growth in Y.

Question 3

Quantity Theory of Money

Answer 3

Change in money supply + change in velocity of money (which is fixed) = change in prices + change in total production. This is derived from mv = py which is true, however, the quantity theory is probably not.

Question 4

Criticisms of Old Monetarist Model (3 distinct things)

Answer 4

(1) Phillips curve doesn’t fit reality and can’t explain unemployment change. (2) In reality, inflation has weak linkages to demand, the wealth effect is very small. (3) The velocity of money is not actually fixed, it varies systematically and is volatile (therefore things other than money matter and a fixed monetary policy is stupid).

Question 5

Determinants of money velocity? Does that lead to a critique? (Long and Short run)

Answer 5

LR) Frequency of Income Payments and efficiency of financial system. SR) As R^, people hold less Money (V^). When people anticipate inflation, V^. If the interest rate is a factor in V, then V is not fixed!