According to the Monetarists, What Is the Main Cause of Macroeconomic

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The Answer is According to the monetarists, the main cause of macroeconomic instability is inappropriate
monetary policy. An increase in the money supply directly increases aggregate demand. Under
conditions of full employment, that increase in aggregate demand raises the price level. For a time,
higher prices cause ﬁrms to increase their real output, and the unemployment rate falls below the
natural rate. But once nominal wages rise to restore real wages, real output moves back to its full-
employment level and unemployment returns to its natural rate. The inappropriate increase in the
money supply leads to inﬂation, together with instability of real output and employment. A decrease
in the money supply reduces aggregate demand. Real output temporarily falls, and the
unemployment rate rises above its natural rate. Eventually, nominal wages fall and real output
returns to its full-employment level. The inappropriate decline in the money supply leads to
deﬂation, together with instability of real GDP and employment.

According to the Monetarists, What Is the Main Cause of Macroeconomic

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