A it is government that has caused downward

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aIt is government that has caused downward inflexibility through the minimum wagelaw, pro-union legislation, and guaranteed prices for some products as in agriculture.b.Monetarists say that government also contributes to the economy’s business cyclesthrough clumsy, mistaken, monetary policies.4.The fundamental equation of monetarism is the equation of exchange. MV = PQ a.The left side, MV, represents the total amount spent [M, the money supply x V, thevelocity of money, (the number of times per year the average rand is spent on finalgoods and services)] b.The right side, PQ, equals the nation’s nominal GDP [P is the price level or morespecifically, the average price at which each unit of output is sold x Q is the physicalvolume of all goods and services produced (real output)].c.Monetarists say that velocity, V, is stable, meaning that the factors altering velocitychange gradually and predictably. People and firms have a stable pattern to holdingmoney.d.If velocity is stable, the equation of exchange suggests there is a predictablerelationship between the money supply and nominal GDP (PxQ).5.Monetarists say that inappropriate monetary policy is the single most important causeof macroeconomic instability. An increase in money supply will directly increaseaggregate demand, causing inflation during periods of full-employment.6.Mainstream economists view instability of investment as the main cause of theeconomy’s instability. They see monetary policy as a stabilizing factor since it can adjustinterest rates to keep investment and aggregate demand stable.C.Real Business Cycle View: A third perspective on macroeconomic stability focuses on aaggregate supply. (See Figure 23.2)1.The view that business cycles are caused by real factors affecting aggregate supply suchas a decline in productivity, which causes a decline in AS. 2.In the real-business cycle theory declines in GDP mean less demand for money. Here,the supply of money is decreased after the demand declines. AD falls, but price level isthe same because AS also declined.D.Coordination Failures: A fourth view relates to so-called coordination failures.
Disputes over Macro Theory and Policy1.Macroeconomic instability can occur “when people do not reach a mutually beneficialequilibrium because they lack some way to jointly coordinate their actions.”2.There is no mechanism for firms and households to agree on actions that would makethem all better off if such a failure occurs. The initial problem may be due toexpectations that are not justified, but if everyone believes that a recession may come,they reduce spending, firms reduce output and the recession occurs. The economy canbe stuck in a recession because of a failure of households and businesses to coordinatepositive expectations.

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