Chapter 35, Problem 2MCQ

To determine

The correct option for central point of monetarism

Answer to Problem 2MCQ

From the available options, the correct option is the Fed should follow a monetary policy rule.

Explanation of Solution

Monetarism specifies that Business cycles and changes in the money supply are related but business cycles not relate with money demand. In business cycle, the monetary policy includes stabilization of prices and wages to maintain a high rate of economic growth as it does not only address business cycles particularly. And, the effectiveness of the policy depends on

Spending, investment and consumption level. According to this theory, the most important factors affecting the rate of economic development and the behavior of the business cycle are the changes in supply of money which means the Fed needs to follow a monetary policy rule.

Therefore, the correct option is d (Fed should follow a monetary policy rule) and all other options are incorrect.

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, money supply is the large source that guide the economic development or growth in the country.