Define the following terms and explain their importance to the study of macroeconomics.
a. velocity
b. equation of exchange
c. monetarism
d. automatic stabilizer
What will be an ideal response?
a. Velocity is the number of times per year that an “average dollar” is spent on goods and services. It is calculated as the ratio of nominal GDP to the money supply. The value of the velocity number is very important in the equation of exchange.b. The equation of exchange states that the money value of goods and services demanded in the economy must equal the size of the money supply times the value of velocity. This equation underlies the monetarist theory of how money affects the macroeconomy.c. Monetarism is a method of analysis that emphasizes the equation of exchange as an explanatory theory of the macroeconomy. In contrast to Keynesian analysis, monetarism sees the stock of money as the most important determinant of the level of nominal GDP and prices. Like Keynesian analysis, it focuses on the aggregate demand side of the economy.d. An automatic stabilizer is any government program that serves to stabilize aggregate demand without policymakers having to make new decisions or take new actions. An example of automatic stabilizers would be unemployment benefits. In a recession, benefits would increase to support aggregate demand when private incomes are falling.
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