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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

Which statement best captures the central monetarist view associated with Milton Friedman about the relationship between money and prices?

Monetarists, led by Friedman, argue that sustained inflation is a monetary phenomenon: it occurs when the money supply grows faster than real output over the long run. They reject cost-push explanations and a permanent inflation-unemployment trade-off.

  1. AInflation is always and everywhere a monetary phenomenon, arising when money supply grows faster than output over the long runCorrect
  2. BInflation arises mainly from trade union wage demands, independent of money supply growth
  3. CInflation is caused only by shortages of key commodities and cannot be influenced by central bank policy
  4. DInflation is a permanent trade-off that governments can exchange for lower unemployment
  5. Inflation is irrelevant to real economic outcomes because money is never created by banks

Explanation

Monetarists hold that sustained inflation results from money supply growing faster than real output. Cost-push explanations and a permanent inflation-unemployment trade-off are rejected by monetarists, who see the Phillips trade-off as only short-run.

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