mandRb = return on bondsRe = return on equityRd = return on durable goodsK = increase in the velocity of moneyAlso, K is not constant, but depends on asset returns or alternatives to holding money. For Friedman, an increase in the return on any of the assets caused money demand to decline. The assumption that is required in order to be considered the strong form of the Quantity Theory of Money is assuming that the variable in “K” (i.e. Rb, Re, Rd) have little effect on money demand. This makes velocity nearly constant. Ms = Md = K (constant) x p x y. The strong form extends the Quantity Theory of Money from a theory of money demand to one of nominal income. This also asserts the economic importance of money and therefore monetary policy.6. Monetarists view fiscal policy as ineffective.Effect of an increase in Government Expenditures – Reflects monetarist view that fiscal policy was ineffective because “Y” changes little.Monetary Policy/Increase in Money Supply – Monetarist and Keynesians believed that changes in the money supply (Ms) could have significant effects on nominal income.8.Macroeconomic Equilibrium with short run & long run supply curves. Long run has higher prices only. Short run has higher prices & output. Output increases from Y* to Y1, employment goes up, unemployment goes down, prices go up.Phillips Curve – negative relationship between unemployment & inflation.Ultimately, the monetarist policy implication is that attempts to lower employment below its “natural rate” will only be successful in the short run. Over the long term, these policies will be inflationary. In the short run, we can exceed the natural rate because workers are fooled into supplying more labor than the correct real wage would bear. However, excess demand for labor will force wages higher in the long run. Thus, monetary policy is effective in the short run, but not in the long run.9....
