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Chapter 15: Problem 12

During a recession, if the money supply were increased \((\mathrm{LO4}, 5)\) a) the Keynesians and the monetarists agree that people would probably just hold on to these funds b) the Keynesians and the monetarists agree that people would spend this money on assets of one kind or another c) the Keynesians believe people would probably just hold on to these funds, while the monetarists believe people would spend this money on assets of one kind or another

Short Answer

Expert verified
c) The Keynesians believe people would probably just hold on to these funds, while the monetarists believe people would spend this money on assets of one kind or another.

Step by step solution

01

Understand Keynesian Economics

Keynesian economists advocate for an increase in government spending and a decrease in taxes to stimulate demand in the economy. When the money supply is increased during a recession, Keynesians usually believe that people would prefer to hold onto their money instead of spending because they are uncertain about the future economic conditions. This is called the liquidity preference. 2.
02

Understand Monetarist Economics

Monetarist economists believe that the money supply is the primary determinant of economic activity. They emphasize the importance of controlling the money supply to manage inflation and stabilize the economy. According to monetarists, an increase in money supply during recession would encourage people to spend more, as they would prefer to invest in assets rather than holding on to cash that is losing value due to inflation. 3.
03

Analyze the given choices

Now we need to analyze the given choices to determine which one correctly represents the views of both Keynesians and Monetarists. a) Both Keynesians and Monetarists agree that people will hold on to the funds - This statement does not correctly represent Monetarist's view. b) Both Keynesians and Monetarists agree that people will spend the money on assets - This statement does not correctly represent Keynesian's view. c) Keynesians believe people would hold on to the funds, while Monetarists believe people would spend on assets - This statement correctly represents the viewpoints of both Keynesians and Monetarists.
04

Conclusion

Based on our understanding of Keynesian and Monetarist economic theories and their views on increasing the money supply during a recession, we can conclude that the correct answer is: c) The Keynesians believe people would probably just hold on to these funds, while the monetarists believe people would spend this money on assets of one kind or another.

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Most popular questions from this chapter

The monetarists criticized (LO5) a) the stop-and-go policies of the Federal Reserve b) the ineffectiveness of monetary policy at fighting inflation c) the importance given to money by the Keynesians d) the Fed for keeping a heavy foot on the monetary brake and allowing the money supply to rise by only 3 percent a year

During inflations, we want (LO9) a) budget deficits and faster monetary growth b) budget deficits and slower monetary growth c) budget surpluses and faster monetary growth d) budget surpluses and slower monetary growth

The main point made by Richard Thaler and Cass Sunstein in Nudge was that ( \(\mathrm{O8})\) a) most people almost always act in their own economic self-interest b) most people almost never act in their own economic self-interest c) by changing the default, you can induce more people to act in their own economic self-interest d) the strongest inducement to get people to do what is good for the economy is to offer them "free money"

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Big government was ushered in during the \- (LO4) a) \(1920 \mathrm{~s}\) c) \(1960 \mathrm{~s}\) b) \(1930 \mathrm{~s}\) d) \(1980 \mathrm{~s}\)
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