Monetarism, the economic theory associated with Milton Friedman

Question

Monetarism, the economic theory associated with Milton Friedman (although it long preceded him), argues that major variations in the economy derive from changes in the supply of money, rather than, for example, fluctuations in stock prices. According to this theory, the way to maintain stability in the economic system is to ensure stability in the amount of money issued, increasing that amount only in relation to an increase in the gross domestic product (GDP).

Unlike Keynesians, monetarists believe that the role of government in economics should be minimal and that fiscal policy is often damaging to the overall economy. They tend to assume that markets work best when they are left to their own devices, preferring a laissez-faire course of inaction to governmental interference in the marketplace.

In the 1970s, this theory seemed to gibe with the inflation spikes that were occurring—although to some degree inflation was tagged to oil prices, there was also a clear rate of money growth that could be a secondary cause. Monetarists insisted that the Federal Reserve System should never manipulate the money supply in an attempt to stabilize the economy—that the economy was essentially stable as long as the money supply was stable, and no other discretionary policies were needed. However, inflation in the 1990s was unrelated to monetary policy, and in the 2000s, it became clear that pure monetary policy was unable to stimulate the economy in any lasting way.

Ultimately, monetarists seem to have succeeded in one thing only: Today’s monetary authorities better understand the role of money in the stability of economies and recognize the need for caution in the manipulation of the money supply. Fiscal policy is no longer divorced from monetary policy, and the two work in tandem to inject stability into the system.    1 
 1. From the presentation of the information in the passage, it can reasonably be inferred that the author believes which of the following about monetarism?

(A) It is a failed theory with little bearing on today’s economy.
(B) It is more relevant today than Keynesianism is.
(C) It should have focused less on the money supply and more on GDP.
(D) It took old laissez-faire theories and turned them upside down.
(E) Its main premise failed, but it still influences current policy.

2 
 2. Based on the passage, a true monetarist would most likely agree with which of the following statements?

(A) Changes in prices are not linked to expansion or contraction of the national money supply.
(B) An increase in money supply in one nation can easily destabilize the economy of a neighboring nation.
(C) To stabilize the economy, the government of an underdeveloped nation must invest in several industries simultaneously.
(D) The Great Depression represented a time of too little money infused throughout the system.
(E) Lowering taxes and decreasing regulation are required steps for any economic growth.

3 
 3. Which of the following titles would be most appropriate for this passage?

(A) “Keynesian vs. Monetarist Thought”
(B) “Nobelist Friedman and the Chicago School”
(C) “A Brief Look at Monetarism”
(D) “The Proper Role of Money”
(E) “Failed Policies at the Fed”

4 
 4. The author implies which of the following about monetarist theory?

(A) It was devised as a means to counter Keynesianism.
(B) It was tied to politics and thus doomed to failure.
(C) It weakened the role of the Federal Reserve System.
(D) It failed to take globalization into account.
(E) It fit patterns of the 1970s but not of the 1990s.

5 
 5. Based on the second paragraph, you might infer that the relationship of Keynesians to monetarists is most similar to the relationship between

(A) monarchists and republicans
(B) federalists and nationalists
(C) globalists and regionalists
(D) conservatives and neo-conservatives
(E) statists and libertarians

Ruchi007 · Answer

Sajjad1994  How to attempt #5?

Sajjad1994 · Answer

Based on the information provided in the second paragraph, the relationship of Keynesians to monetarists is most similar to the relationship between  (E)  statists and libertarians. Monetarists, like libertarians, believe in minimal government intervention in the economy and prefer a laissez-faire approach. Keynesians, like statists, believe in a more active role for government in economic affairs.

ArmaanBajaj · Answer

Can someone answer 2 with an explanation

guddo · Answer

2. Based on the passage, a true monetarist would most likely agree with which of the following statements?

A true monetarist believes that major economic changes are mainly caused by changes in the money supply. So an economic collapse would most likely be explained by too little money circulating in the system.  The key idea  is monetary supply, not government spending or broad  fiscal intervention .

(A) Changes in prices are not linked to expansion or contraction of the national money supply.

Incorrect. This is the opposite of monetarism. Monetarists believe economic changes, including inflation, are strongly linked to the money supply.

(B) An increase in money supply in one nation can easily destabilize the economy of a neighboring nation.

Not supported. The passage discusses the money supply within an economy, not effects on neighboring countries.

(C) To stabilize the economy, the government of an underdeveloped nation must invest in several industries simultaneously.

Incorrect. Monetarists favor minimal government intervention, not broad government investment.

(D) The Great Depression represented a time of too little money infused throughout the system.

Correct.   This fits monetarist thinking: if major economic downturns come from changes in the money supply, then a depression would be explained by insufficient money in circulation.

(E) Lowering taxes and decreasing regulation are required steps for any economic growth.

Too broad. Monetarists prefer limited government, but the passage’s central claim is about the money supply, not tax cuts and deregulation as required for all growth.

Answer: (D)

egmat · Answer

Hi ArmaanBajaj,

Happy to walk through #2. The key is to anchor every choice back to the  core  claim of monetarism, not to a side detail.

Paragraph  1  gives you that core claim:  "major variations in the economy derive from changes in the supply of money,"  and stability comes from a stable money supply. So a true monetarist explains any big economic swing - boom or collapse - by pointing to the  money supply .

Why D is right

Choice (D) says the Great Depression was  "a time of too little money infused throughout the system."  That's the money-supply premise applied to a real event: a major contraction is explained by a shortfall of money. It lines up exactly with paragraph  1 .

Why the tempting choice, E, fails

Most people who miss this pick (E) - "lowering taxes and decreasing regulation are  required  for  any  economic growth" - because paragraph  2  says monetarists want minimal government and prefer laissez-faire. But watch two things:

- Paragraph  2  is about  government's role , which is a  secondary  attribute of the theory - not its defining engine, the money supply.
- The words  "required"  and  "any"  are far too extreme. The passage never says tax cuts and deregulation are needed for  all  growth; the monetarist focus is on keeping money stable, not on fiscal/regulatory steps.

Quick eliminations: (A) reverses monetarism (they say prices  are  tied to money supply); (B) cross-border spillover is never discussed; (C) government investing in industries is the interventionist/Keynesian view - the opposite.

Habit to build:  when a question asks what a theory's believer would agree with, match the answer to the theory's  central mechanism  first, and be suspicious of any choice carrying absolute words like  any ,  required ,  never . Here, "money drives the economy" points straight to D.

Answer: D

KanavChopra · Answer

The passage tell us that:
 
 Monetarists: They want less government intervention and more free markets. 
 Keynesians: They want more government intervention through fiscal policy (Use of government spending and tax policies to influence country's economy)  
So the relationship is:  Government intervention vs Minimal government intervention 
Now,
(A) Is about forms of government
(B) Distribution of political powers
(C) International vs local
(D) It also doesn't capture the intervention vs non-intervention
(E) Statists believe the state should play a significant role, and Libertarians believe government should interfere as little as possible.  Correct Answer

Monetarism, the economic theory associated with Milton Friedman

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Reading Comprehension (RC) Questions

Monetarism, the economic theory associated with Milton Friedman

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards