Monetarists believe all of the following except:
A)fluctuations in the money supply are responsible for most large fluctuations in the economy.
B)the Fed should keep the money supply growing at a steady rate.
C)slow and steady growth of the money supply would yield stable output, employment, and prices.
D)the Fed should adjust the money supply to adjust to various shocks to the economy.
The Correct Answer and Explanation is :
The correct answer is:
D) the Fed should adjust the money supply to adjust to various shocks to the economy.
Explanation:
Monetarists, led by economist Milton Friedman, believe in the power of the money supply to influence economic outcomes. They argue that fluctuations in the money supply have a significant impact on the overall economy, and that these fluctuations are responsible for much of the economic volatility seen over time. Monetarists believe in the importance of a stable and predictable monetary policy to maintain steady economic growth and avoid inflation or deflation.
Let’s break down the choices:
A) Fluctuations in the money supply are responsible for most large fluctuations in the economy.
Monetarists believe this. According to monetarist theory, changes in the money supply can lead to economic fluctuations. For example, if the money supply grows too quickly, it can cause inflation, while a decrease in the money supply can lead to economic downturns and recessions.
B) The Fed should keep the money supply growing at a steady rate.
This statement is also consistent with monetarist theory. Monetarists advocate for a fixed annual growth rate of the money supply, typically aligned with the potential growth of the economy. They argue that a steady rate of growth in the money supply is the key to maintaining stable prices and avoiding economic instability.
C) Slow and steady growth of the money supply would yield stable output, employment, and prices.
Again, this aligns with monetarist beliefs. Monetarists argue that a predictable and controlled increase in the money supply would result in stable economic conditions. By avoiding excessive volatility in the money supply, inflation and unemployment can be kept in check.
D) The Fed should adjust the money supply to adjust to various shocks to the economy.
This is where monetarists diverge from other economic schools of thought. Monetarists are generally against the idea of actively manipulating the money supply to respond to economic shocks. They believe that the money supply should grow at a fixed rate, regardless of short-term fluctuations in the economy. In their view, the economy is best served by predictability, and intervention to address shocks could lead to more harm than good.
Monetarists argue that attempting to adjust the money supply in response to economic shocks often results in overreaction, leading to unintended consequences such as inflation or deflation.
Image:
I will now generate an image to visually represent this concept.
The image above illustrates the differences between monetarist and Keynesian economic theories. On the left side, you can see the steady, predictable growth of the money supply, which represents the monetarist approach. On the right side, there’s a fluctuating money supply reacting to economic shocks, representing the Keynesian approach. This visual contrasts the predictable, long-term stability emphasized by monetarists with the more interventionist approach of Keynesians.