(L7) Friedman, M., 1968, The role of monetary policy, American Economic Revie Flashcards
What are the major goals of economic policy according to Friedman?
The major goals are high employment, stable prices, and rapid growth.
How has the opinion on monetary policy’s role changed over time?
Opinions have fluctuated. Initially, the Federal Reserve was credited for the stability of the 1920s, but post-Great Depression, its efficacy was questioned, leading to Keynes’ influence.
What was Keynes’ view on monetary policy during the depression?
Keynes argued for the impotence of monetary policy in depression and suggested fiscal policy as an alternative.
When and why did the belief in the effectiveness of monetary policy revive?
Belief in monetary policy’s effectiveness revived post-World War II, especially among economists, due to theoretical developments and re-evaluation of its role during 1929-1933.
What are the main limitations of monetary policy as discussed by Friedman?
Friedman points out the inability of monetary policy to peg interest rates and unemployment rates for extended periods.
How does monetary policy influence interest rates?
Attempts to maintain low interest rates through monetary expansion eventually lead to inflation, which raises interest rates.
Can monetary policy sustainably peg unemployment rates?
No, similar to interest rates, it cannot sustainably peg unemployment rates. Unanticipated inflation can temporarily reduce unemployment, but this effect is short-lived.
What are ‘natural’ rates according to Friedman?
Friedman introduces the concept of ‘natural’ rates of interest and unemployment, which are determined by market forces and not easily influenced by monetary policy.
What is the real impact of monetary policy?
Monetary policy cannot directly control real quantities like interest rates or employment but significantly influences nominal quantities, thereby indirectly impacting the economy.
What is Friedman’s view on monetary stability and economic background?
Friedman emphasizes the importance of a stable monetary background for economic stability and criticizes the gold standard and fixed exchange rates, advocating for controlling money supply growth.
How does Friedman recommend conducting monetary policy?
Friedman advocates for a steady rate of monetary growth to contribute to economic stability and prevent major economic disturbances.
What is the role of monetary policy in economic disturbances?
Monetary policy can offset major economic disturbances, but its ability to counteract minor fluctuations is limited due to insufficient knowledge and predictive capabilities.
What are Friedman’s recommendations for monetary policy?
Friedman recommends that monetary authorities focus on magnitudes they can control, like the money supply, and avoid drastic policy swings to promote economic stability.
