One of the business cycle facts is that “the nominal money supply is a pro-cyclical and leading variable”. Traditional Keynesian theory explains this fact with the transmission mechanism of money. The New Classical approach uses misperceptions theory explanation. The RBC theorist try to explain the relationship with reverse causation theory.According to Keynesian theory, under what conditions money would be effective to have real effects? If money is effective to have real effects, explain the transmission mechanism that shows the causation from money to output.According to the “misperceptions theory of business cycles”, how and why an increase in nominal money supply causes an increase in real output in the short run by affecting the behavior of producers? Does your answer change if the monetary shock is anticipated or unanticipated? Explain by using the IS-LM-FE and AD-AS Frameworks.Explain how reverse causation could occur and what is the explanation from RBC theorist that money is neutral?

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Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section14.2: Monetarism

Problem 1ST

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One of the business cycle facts is that “the nominal money supply is a pro-cyclical and leading variable”. Traditional Keynesian theory explains this fact with the transmission mechanism of money. The New Classical approach uses misperceptions theory explanation. The RBC theorist try to explain the relationship with reverse causation theory.

According to Keynesian theory, under what conditions money would be effective to have real effects? If money is effective to have real effects, explain the transmission mechanism that shows the causation from money to output.
According to the “misperceptions theory of business cycles”, how and why an increase in nominal money supply causes an increase in real output in the short run by affecting the behavior of producers? Does your answer change if the monetary shock is anticipated or unanticipated? Explain by using the IS-LM-FE and AD-AS Frameworks.
Explain how reverse causation could occur and what is the explanation from RBC theorist that money is neutral?

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