milton friedman is a cocksleeve for capitalism

Question 1

monetarism

Answer 1

controlling the supply of money as the chief method of stabilizing the economy

Question 2

car metaphor (w/ controlling money supply)

Answer 2

accelerator → “higher money supply”
brake → “lower money supply”

Question 3

Federal Reserve Board’s definition of money supply

Answer 3

the amount of currency held outside the banks + the amount of funds in checking accounts (“demand deposits”) at commercial banks

Question 4

what is the correct money supply level

Answer 4

enough to buy all the goods produced

Question 5

velocity of money

Answer 5

rate at which the money stock turns over each year

Question 6

equation for velocity of money

Answer 6

V = level of GDP/money supply

Question 7

crude quantity theory assumes that

Answer 7

• velocity is constant
• the amount of goods and services that can be produced is fixed in the short run
• V and Q are erased from the equation

Question 8

3 ways the Federal Reserve Board manipulates the money supply

Answer 8

• controls the % of deposits that banks are permitted to lend (the reserve ratio)
• controls the interest rate on loans to banks (the discount rate)
• buys and sells government securities (open-market operations)

Question 9

irving fisher equation

Answer 9

MV = PQ

M → the money supply
V → the velocity
PQ → nominal GDP
P → the price level
Q → the amount of goods and services produced (the real GDP)

Question 10

friedman’s response to keynes arguing people adjust consumption with income

Answer 10

he said people maintain expectations about long-run income

Question 11

permanent income hypothesis

Answer 11

people will only shift spending habits when major shifts occur (consumption is stable)

Question 12

criticisms of friedman

Answer 12

• right about velocity in the long run but it deviates in the short term
• lafter curve –> argues that decreases in taxes would increase economic activity