Q: According to which business cycle theory should expansionary monetary policy be used to fight a recession?
a) Keynesian school
b) Monetarist school
c) New classical school
I thought that monetarists believe that by reducing interest rates, expansionary monetary policy will take place. Isn’t it? OA is A. Can someone please explain this to me?
Monetarist school economists believe the variations in aggregate demand that cause business cycles are due to variations in the rate of growth of the money supply. They suggest that the central bank should follow a policy of steady and predictable increases in the money supply. Monetary policy should thus not be used to fight a recession in their view.
Policy prescription of Keynesian economists is to increase aggregate demand directly through either monetary policy and/or fiscal policy.