Chapter 36

Question 1

mainstream view

Answer 1

unstable investment spending

Question 2

MONETARISM view

Answer 2

spending stable

government laws making prices inflexible downward and mistakes in monetary policy

Question 3

EQUATION OF EXCHANGE

Answer 3

MV=PQ

Question 4

VELOCITY

Answer 4

stable in short term implies that changes in PQ are from changes in M

Question 5

RATIONAL EXPECTATIONS THEORY view

Answer 5

firms and households expect monetary and fiscal policies to have certain effects on the economy and take actions that make these policies ineffective

Question 6

REAL BUSINESS CYCLE THEORY

Answer 6

change in productivity TO change in long run as TO change in transactions demand for money TO change in loans TO ad

Question 7

does economy self correct?

Answer 7

monetarism- yes, adaptive expectations, takes time

RET- yes, rational expectations theory, quickly

MAINSTREAM- not during recession

Question 8

EFFICIENCY WAGE

Answer 8

minimizes wage costs per unit of output by encouraging greater effort or reducing turnover

Question 9

INSIDER-OUTSIDER THEORY

Answer 9

nominal wages are inflexible downward because firms are aware that workers who retain employment during recession may refuse to work cooperatively with previously unemployed workers who offer to work for less than the current wage

Question 10

rules vs. discretion

Answer 10

MONETARISM- use rule to prevent mistakes by the fed

RET- also support rule

MAINSTREAM- velocity if variable in short run TO velocity can change to offset monetary policy