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Question from Past Macroeconomics Qualifying Exam (Fall, 2004 - Question five) at George Mason UniversityEdit

Does money matter with respect to the short-run performance of the real economy? How does your answer differ with respect to:

  • a. The Keynesian model?
  • b. The Monetarist model?
  • c. The New Classical model?
  • d. The New Keynesian model?

Which of these models is best supported by recent evidence concerning US monetary policies?

AnswerEdit

  • (a) Keynesians see money as creating nominal moves which have effects on real variables. Money can be used to stimulate the economy. Suprises are encouraged.
  • (b) Of course money matters to the monetarists (primary but not only). They see it playing a large role in adjusting the economy. There should be a constant growth rate, suprises are not encouraged. Stability persists and returns to "natural levels" unless money growth changes. LRPC is vertical. Inflation is a monetary phenomena.
  • (c) The New Classicals use rational expectations and would be the least likely to consider nominal money effects as playing a role in the real economy.
  • (d) The New Keynesians would be more accepting of some of the critiques made since the orthodox Keynesians, but still hold that in the short-run the nominal rigidity holds (they build from micro foundations).

The New Keynesians have had the best sucess with the empirical models, this started to come to light during the last part of the 90's. Mankiw, whoes textbook champions New Keynesians, was appointed chair of the C.E.A., a policy distributing wing of the executive branch, during the first term of George W. Bush's term of office.

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