Notesale: Turn your study into money

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Their approach became
influential during the 1970s and early 80s
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It also states that
the supply of money in an economy is the primary driver of economic growth
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An increase in aggregate demand encourages job creation, which reduces the rate of
unemployment and stimulates economic growth
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They believe that the direction of causation is from left to right in the equation; as the
money supply increases with a constant and predictable (constant) V, one can expect a
increase in either P or Q
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In short, a change in the money supply directly affects and
determines production, employment, and price levels
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He argued that the Phillips curve was in the long
run vertical at the natural rate and predicted what would come to be known as stagflation
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Friedman and
Phelps argued that when workers and firms begin to expect more inflation, the Phillips
curve shifts up (meaning that more inflation occurs at any given level of unemployment)
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Friedman’s predictions were rather accurate as in the 1970s, countries faced stagflation, in
that period Keynesian economics weren’t of much use
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Fiscal
policy proved politically too hard to implement; decisions on spending and taxation were
made for reasons other than their macroeconomic consequences
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So, there was a movement away from Keynesian economic models for formulating policy
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Friedman

Commented [OA1]: Coauthored “A monetary history of
the United States, 1867-1960”
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It can
result when the economy faces a supply shock, such as a
rapid increase in the price of oil
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promoted an alternative macroeconomic viewpoint “monetarism” and argued that a steady,
small expansion of the money supply was the preferred policy
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Based on his detailed study with Anna Schwarz, of the U
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money supply from the end of
the Civil War to 1960, they observed that money supply fluctuations result in economic
fluctuations
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They argued
that the Great Depression of the 1930s was caused by a massive contraction of the money
supply, and not by the lack of investment Keynes had argued
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Monetarists assert that the objectives of monetary policy are best met by targeting the
growth rate of the money supply rather than by engaging in discretionary monetary policy
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Therefore, in the long-term, the increasing demand will eventually be greater than supply,
causing a disequilibrium in the markets
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Due to the inflationary effects that can be brought about by excessive expansion of the
money supply, Friedman asserted that monetary policy should be done by targeting the
growth rate of the money supply to maintain economic and price stability
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This way, money
supply will be expected to grow moderately, businesses will be able to anticipate the
changes to the money supply every year and plan accordingly, the economy will grow at a
steady rate, and inflation will be kept at low levels
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In practice,
this means that the central bank should seek a rate of deflation equal to the real interest rate
on government bonds and other safe assets, to make the nominal interest rate zero
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Milton Friedman says that the combination of economic and political power in the same
hands is a sure recipe for tyranny
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Keynesians on the other hand, saw
discretionary policy as stabilizing (they asserted that the
economists had sufficient knowledge and information about
the economy to make suitable policies)

Commented [OA4]: Used by Fed Reserve chief Paul
Volcker in 1979 to combat the high inflation
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The @Volcker Shock@
continued from 1979 to the summer of 1982, dramatically
both decreasing inflation and increasing unemployment
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But a gradual increase is necessary to prevent
higher unemployment rates
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Keynesian
economics argue that aggregate demand Is the key to economic growth and supports any
action of central banks to inject more money into the economy in order to increase demand
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Proponents of monetarism believe that controlling an economy through fiscal policy is a
poor decision
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Hence, they also advocated for limited government intervention
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Monetary policy can prevent money from causing disturbances, maintain a stable basis for
the economy, and prevent other, more serious problems
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The new classical economists
of the mid-1970s attributed economic downturns to people’s misperceptions about what
was happening to relative prices
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During the 1970s, it became clearer that an analysis incorporating the supply side was an
essential part of macroeconomics and some economists turned to an entirely new way of
looking at macroeconomic issues
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The new approach aimed at
an analysis of how individual choices would affect the entire economic activity
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The NCM economics puts
mathematics tow work in an extremely complex way to generate from individual behaviour
to aggregate results
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They argue that
government can promote growth and stabilize the economy only through supply-side
policies
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𝑥𝑡 = 𝐸𝑡−1 𝑥𝑡 + ɛ

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The value of x today will be the value that we expected it to be plus an error term
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They adjust their expectations
accordingly
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This
occurs as AD↓
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In this new classical world, only surprise change in the money supply can affect output
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People will anticipate that their children or their children’s children will end up paying
more in taxes as a result of the deficit caused by an expansionary fiscal policy
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This will cancel the tendency for the
expansionary policy to affect AD

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