Question

The day after the U.S. stock market crash of October 19, 1987, Federal Reserve Board Chairman Alan Greenspan issued the following statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”  What school of thought may prompt that statement?  That is, which school (or schools) has a role for active monetary policy?

Answer 1

1) Chicago School of thought may prompt that statement.

* Chicago school started by Frank Knight is associated with the monetarist approach to macro economic policy- that is policy for the Chicago school's most prominent almnus was Milton Friedman.His beliefs were opposite to that of Keynes.He was against the use of fiscal policy and started the monetarist revolution.

*Chicago School support monetary policies ,When required by the economic environment, as they assume this to be more reliable and effective than fiscal policies.

* Friedman argued that laissez-fairegovernment policies more desirable than government interventions.

*Chicago school stressed the need for a neutral monetary policy oriented towards long-run economic growth by gradual expansion of the money their theoretical foundation was quantity theory of money.

* Chicago School also emphasized that government should award avoid trying managet agreement aggregate demand instead they should focus should be on maintaining a steady and low rate of growth of money supply because supply of money is the determinant of the National income.