Answer to Question #98418 in Macroeconomics for Tiffany

Question

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.
c. Some people will argue against using either monetary or fiscal policy, instead supporting a laissez-faire approach to the economy. The well-known economist Milton Friedman, for example, believed in the permanent income hypothesis and was also a monetarist. What monetary policy prescription do monetarists support?

Answer 1

Monetarists believe that its dynamics can be predicted. Keynesian money demand function corresponds only to short-term fluctuations in the money market. If the demand for money is defined differently. The effect of the American monetarist Fisher. Its meaning is as follows. If the state resorts to monetary expansion, this will lead to a temporary reduction in interest rates. However, this increases the inflationary process.

It affects the expectations of the subjects of the economic system, which, when planning market decisions, are based on the latest inflationary experience and count on the next expansion of the money supply and the price growth rate. This leads to an increase in demand for money, which after a certain time leads to an increase in interest rates. Ultimately, a rate of interest is established that balances the money market.