Question

1) Why would a Keynesian monetarist use a contractionary monetary policy? What goals are they trying to achieve and why? (3 points)

​​​2) In the neoclassical money market (interest rates on the vertical axis) what does AS represent? (2 points)

3) In the neoclassical money market, how can AS shift to the right without shifting AD? How could this be accomplished? Why would the outcome of growth with lower interest rates be desired? (5 points)

4) Why are nominal interest rates not a good monetary target for expansionary monetary policy if inflation is expected? (3 points)

5) What is one example of a monetary aggregate that can be used as a target for long term policy? (2 points)

Answer 1

1. Keynesian monetarists believe that a contractionary monetary policy i order to stimulate the market. Expansionary fiscal policy causes crowding out effect in the long run and there is no real increase in the output level.

By keeping the money supply low the monetarist try to control inflation levels in the market. This is done under the observation that the real wage levels are not very flexible. By keeping inflation low, the unemployment rate can also be controlled.

2.The aggregate supply curve shows the quantity of real GDP. The GDP levels are supplied at different price levels. The long run aggregate supply is vertical, i.e. parallel to price axis that is the natural level of unemployment , constant in long run.

3.The aggregate supply curve can be made to shift to the right with oveall economic growth of an economy. While if the economy falls, the AS curve shifts to the left.

Outcome with lower interest rates are desired because a fall in rate of interest ( Monetary tool), will cause a rise of money supply in the market. With this rise of money supply, the economy can be enhanced. This is why growth with lower interest rate is desired to be observed to make an economy grow.

4.Nominal Rate of interests are measured without the consideration of the inflation in the market.Hence, If inflation is expected, targeting nominal rate of interest is not effective at all .