Answer to Question #98416 in Macroeconomics for Tiffany

Question

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.

b. The main argument against monetary policy is that it affects only nominal variables, not real variables. Explain this argument using the two methods below.
(i) Explain and show on a graph the short-run and long-run equilibrium changes in the AD/AS model from expansionary monetary policy. How does this support an anti-monetary policy stance?
Answer:

(ii) Explain the equation of exchange. What do quantity theorists believe, and why don't they support monetary policy?

Answer 1

Debate concerning both monetary and fiscal policy

We need to Debate concerning both monetary and fiscal policy

Answer:

(b)

(i).

If the bank interest rates are kept low for long time, it will lead to a liquidity trap.

So, Economic Policies can be ineffective during recessions and better effective during economic expansions.

(ii). Explanation about the equation of exchange.

The relation of the equation of exchange is: M.V = P.Q,

Here, For a given period,

M Represents the total nominal amount of money supply in circulation on average in an economy.

V represents the velocity of money that is the average frequency with which a unit of money is spent.

P represents the price level.

Q represetns about an index of real expenditures (on for newly produced goods and services).

Here, we have some issues with this, those are:

(i) To estimate M and P are very difficulty

(ii). V is not an independent variable here. but a residual one, it can be calculated algebraically by first knowing the other three.

(iii). T is almost impossible to Evaluate for any period or even to comprehend.

We can overcome from these issues by the Quantity theorists by ignoring the total volume of transactions and considering expenditures (or) the aggregate of net national expenditures.

So,

Monetary policy is not effective much, rather fiscal policy is rather effective.