Chapter 35, Problem 1FRQ

a)

To determine

Business cycles are associated with which fluctuation according to monetarism.

Explanation of Solution

According to the monetarist, the most important factors affecting the rate of economic development and the behavior of the business cycle are fluctuations in the money supply. There are fluctuations in the supply of money in this case because it considers velocity to be relatively steady, which suggests that the money supply is mostly responsible for determining nominal income.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And according to monetarists, the money supply is the large source that guides the economic development or growth in the country.

b)

To determine

Whether monetarism advocates discretionary fiscal policy and discretionary monetary policy.

Explanation of Solution

No, both discretionary monetary and fiscal policies are not promoted by monetarism because discretionary powers of monetarism can destabilize the economy. Moreover, monetarism can also make a wrong estimate of the importance of economic slack in a country at a particular time.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And according to monetarists, the money supply is the large source that guides the economic development or growth in the country.

c)

To determine

What monetary policy is suggested by monetarism?

Explanation of Solution

The amount of money in the economy is adjusted through monetary policy which is one of the tools available in the economy and is used by the government to influence the overall functioning of the economy. According to monetarists, the best way to achieve monetary policy goals is to focus on the rate at which the money supply is expanding. Therefore, according to monetarism, the best monetary policy is the monetary policy rule that maintains the nominal income target.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And according to monetarists, the money supply is the large source that guides the economic development or growth in the country.

d)

To determine

The velocity equation and what each letter in the equation stands for?

Explanation of Solution

The following velocity equation can use to explain monetarism:

  $\text{M}\times \text{V = P}\times \text{V}$

Here, each letter in the statement stands for

M is the money supply,

V = velocity of money,

P = aggregate price level and

Y = real GDP

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And according to monetarists, the money supply is the large source that guides the economic development or growth in the country.

e)

To determine

The velocity equation’s used to explain the major conclusion of monetarism.

Explanation of Solution

The velocity equation is used to explain the major conclusion of monetarism as it indicates that Since V (velocity of money) is stable, a consistent increase in M (money supply) will result in a consistent increase in gross domestic product.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And according to monetarists, the money supply is the large source that guides the economic development or growth in the country.