Problem 17 Does the monetary policy of mark... [FREE SOLUTION]

Chapter 15: Problem 17

Does the monetary policy of market monetarists take into account changes in velocity? Explain your answer.

Short Answer

Expert verified

Yes, Market Monetarists do consider the changes in the velocity of money. According to their theory, any changes in the velocity of money require a corresponding adjustment in the growth rate of the money supply in order to maintain nominal GDP stability.

Step by step solution

Understand the Concept of Market Monetarism

Market Monetarism is a school of thought that advocates for nominal GDP targeting. They argue that a central bank can and should maintain a stable nominal GDP growth rate to ensure economic stability. The stability of nominal GDP growth curves fluctuations in aggregate demand, and smoothens the business cycle

Understand the Concept of Velocity of money

The velocity of money is the rate at which money is exchanged in an economy. It is defined as the ratio of nominal GDP to the money supply. In other words it's how many times a unit of money will turn over in a given period.

Does Market Monetarism consider changes in velocity?

Yes, Market Monetarists do consider changes in velocity. They are aware that changes in the velocity of money can disrupt nominal GDP stability. For market monetarists, any change in velocity would require an adjustment in the growth rate of the money supply to maintain nominal GDP stability.