According to the “misperceptions theory of business cycles”, how and why an increase in nominal money supply causes an increase in real output in the short run by affecting the behavior of producers? Does your answer change if the monetary shock is anticipated or unanticipated? Explain by using the IS-LM-FE and AD-AS Frameworks. c. Explain how reverse causation could occur and what is the explanation from RBC theorist that money is neutral?
One of the business cycle factsis that “the nominal money supply is a pro-cyclical
and leading variable”. Traditional Keynesian theory explains this fact with the transmission
mechanism of money. The New Classical approach uses misperceptions theory explanation. The
RBC theorist try to explain the relationship with reverse causation theory.
a. According to Keynesian theory, under what conditions money would be effective to have
real effects? If money is effective to have real effects, explain the transmission mechanism that
shows the causation from money to output.
b. According to the “misperceptions theory of business cycles”, how and why an increase in
nominal money supply causes an increase in real output in the short run by affecting the
behavior of producers? Does your answer change if the monetary shock is anticipated or
unanticipated? Explain by using the IS-LM-FE and AD-AS Frameworks.
c. Explain how reverse causation could occur and what is the explanation from RBC theorist
that money is neutral?
Answers of b and c
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