Homework Lance
ADM 614 Topic 7 DQ 2
As a monetarist, Milton Freidman suggested that the government should only release the amount of money into the economy that matches the GDP production. Discuss how the entire demand curve for money will adjust to the equilibrium point. Would you agree with Milton Freidman’s opinion on the ability of monetary policy to address economic problems? Explain your rationale.
Answer:
Likewise, a change in the intercept term in the money demand function would permanently shift the relationship between the levels of money and prices, but would, once the shift to the new intercept was complete, wash out entirely from the first differenced money demand function which is the underpinning of the money growth/inflation relationship. Furthermore, a one-time shift in the long-run
interest semielasticity of money demand, such as has been argued by Ireland (2009) to have occurred in recent years in the case of M1 demand, does not affect the longer-term relation between money growth and inflation, provided averages zero. Summing up, while the price level homogeneity of the money demand function iscrucial for delivering quantity-theory relations, instability in several other aspects of the long-run money demand relation does not preclude a close relation between money growth and inflation.
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