Q2. Describe the different views on monetary policy between Keynesians and Monet
ID: 1103959 • Letter: Q
Question
Q2. Describe the different views on monetary policy between Keynesians and Monetarists. Begin with the Keynesian view on how the money supply affects interest rates and goes on to affect aggregate demand through the effect of interest rates on investment demand. Contrast that with the Monetarist focus on a steady and predictable money supply. How is that said to promote growth and create jobs? Q3! Describe the business of banking, based on the concepts of "fractional reserves," "demand for money," and the "money multiplier." How does the Federal Reserve control the money supply that is created by banks?Explanation / Answer
ans 2=
Consider the following equation:
MV equals PQ
In the above,
M = supply of money, Q = amount of national product sold in a particular year, P = average price level & V = income-velocity of the circulation of the funds. PQ = money worth of the national product that is sold. MV = overall spending on the national product, & thus must be equivalent to PQ
The monetarists claim that in the long-term V is ascertained completely autonomously of the M. Hence an alteration in M leaves V unimpacted but brings about a corresponding alteration in the expenditure level in the economy. Monetarists argue that monetary strategy over the long-run is a very powerful tool for controlling the aggregate demand (i. e PQ).
Keynesians claim that V has a tendency to vary inversely with money supply, however, unpredictably. A rise in M will not essentially have too much impact on spending. Rather persons may simply raise their holdings of idle balances with a consequent fall in the pace with which funds circulate (V)
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