Milton Friedman was a professor of economics at the University of Chicago and was the most influential

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Milton Friedman was a professor of economics at the University of Chicago and was the most influential Monetarist of his generation. He was known for accusing the Federal Reserve (the U.S. central bank) of following "an unstable monetary policy," arguing that although the Federal Reserve "has given lip service to controlling the quantity of money ... it has given its heart to controlling interest rates."

a. Explain why if the \(M_{D}\) function were approximately stable, targeting the growth rate in the money supply would produce a "stable" monetary policy. Show this in a diagram.

b. Explain why if the \(M_{D}\) function moves suddenly and in unpredictable ways, targeting the money supply produces an "unstable" monetary policy. Show this in a diagram.

c. The Bank of Canada conducts its policy by setting short-term interest rates. What is the implication for this policy of an "unstable" \(M_{D}\) function?

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Macroeconomics

ISBN: 9780133910445

15th Edition

Authors: Christopher T S Ragan

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