Question

In: Economics

What are the basic elements of the monetarists’ position? Do they seem justified? Why?

What are the basic elements of the monetarists’ position? Do they seem justified? Why?

Solutions

Expert Solution

there are three basic propositions in the monetarists-

1) money supply will influence nominal income.

2) short run - money supply will influence real variables

long run - real variables are affected by real factors not monetary ones.

3) private sector is stable. any imbalance will be caused by government policies.

Friedman's money demand theory can be used to restate the Cambridge equation.

M = Md = k ( rB , rE , rD )PY , where rB,rE,rD are nominal interest rates on bonds ,equities and durable goods.

so from here we can see money to be directly influencing nominal income. since money growth affects price level hence the level of nominal income.

In short run since wages and prices are fixed, money supply is surely going to affect real variables. Keeping this view in mind we've derived the short run AD curve from IS-LM model. When money supply changes in short run due to fixation of prices there was shift in the LM curve causing changes in the income/output ( both real ) level .

in the last point it has been said its the government policies which causes instability in the economy. As one monetarist Karl Brunner, put it, the private sector is " essentially a shock- absorbing, stabilizing and self adjusting process. Instability is produced dominantly by the operation of the government sector." Instability is caused by government due to variability in the growth of money supply.


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