Unit 3: Macroeconomic Policy

Lesson 16b: Monetary Policy - Other Monetary Policy Issues

Outcomes - What you should learn

TOPICS

Strengths and Shortcomings of monetary policy.

Compare Mainstream and Monetarist views:

- Causes of Macroeconomic instability
- Does the economy self-correct?
- Rules or Discretion?

OUTCOMES

Know the strengths and shortcomings of monetary policy.

Describe two alternative perspectives on the causes of macroeconomic instability: those held by Mainstream (New Keynesian) economists and the Monetarists (New Classical)

Explain what the equation of exchange is and how it relates to "monetarism."

Discuss why the Monetarists (New Classical) believe the economy will "self-correct" from aggregate demand and aggregate supply shocks. Explain the view of self-correction held by Mainstream (New Keynesian) economists.

List three reasons why a higher wage could result in greater efficiency (efficiency wage).

Identify and describe the variations on the debate over "rules" versus "discretion" in conducting stabilization policy.

Mainstream (New Keynesian) economists believe monetary policy is not very effective but it should be used to accommodate fiscal policy. Monetarists (New Classical) economists believe monetary policy is very effective but should not be used with discretion. EXPLAIN.

 

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Lesson 16b