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Unformatted text preview: policy can be used to return the economy to the natural rate of output. Are Keynesians in favour of such policies? Explain why or why not. 5. According to monetarists, what causes business cycles and inﬂation? Using the monetarist model, explain why a policy rule for controlling the money supply will both stabilise short-run business cycles and ensure long-run price stability. 6. Suppose that a treaty is signed limiting armies throughout the world. The result of the treaty is that the public expects military and hence 1 government spending to be reduced. If the new classical view of the economy is correct and government spending does aﬀect the aggregate demand curve, predict what will happen to aggregate output and the price level when government spending is reduced in the line with the public’s expectations. 2...
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This note was uploaded on 07/02/2009 for the course ECON 0280 taught by Professor Jamesmaloy during the Summer '09 term at Pittsburgh.
- Summer '09