ECON 364
Homework Assignment Four – (26 pts.)

DUE THURSDAY, FEB. 17 AT THE BEGINNING OF CLASS

ANSWERS MUST BE TYPED - EXCEPT GRAPHS - AND ALL PAGES MUST BE STAPLED!

1.  Explain (using both graphs and words) why money growth causes inflation under the monetarist view. Use both a money market graph (with the purchasing power of money and the quantity of money on your axes) AND the AD/AS graph to explain.  Be sure to explain each step of the process. (8 pts.)

2.  Now explain why an increase in the money supply might not cause inflation - just in words, no graph. (4 pts.)

3.  Explain the "interest rate effect" in the Monetarist world -- that is, why a fall in AD is not a problem because investment will automatically go up to offset (at least partly) this fall in AD. (6 pts.)

4.  Draw and explain the Phillips curve, both in the short run (Keynes) and the long run (Monetarist). (8 pts.)