Which of the following is a position held by monetarists? The economy is unstabl
ID: 1200264 • Letter: W
Question
Which of the following is a position held by monetarists? The economy is unstable; wages and prices are inflexible. The short-run aggregate supply curve slopes downward. Aggregate demand does not depend on the money supply and velocity. Changes in the velocity of money are predictable. Initially, the economy is in long-term equilibrium. Suppose there is a decrease in the money supply. Show the long-run effect of this change according to the monetarist view, ceteris paribus, by dragging one or both curves on the graph below.Explanation / Answer
2. Option D is correct.
Monetarists believed that velocity is not constant, rather it dos not change randomly. Velocity changes in a way that can be predicted.
3. According to the Monetarist view, a decrease in money supply in the long run would change only the price level and not the real GDP.
A decrease in money supply would shift the AD curve to the left, causing a recessionary gap and eventually reducing the wages of the workers. Over a period of time, the firms would be willing to employ more workers due to reduced wage and the SRAS curve would shift to right back to the original real GDP point with only higher prices than earlier.
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