Question

According to monetarist thought, the natural rate of unemployment and output is not determined by

• A. Capital Stock
• B. Size of labour force
• C. Level of technology
• D. Aggregate demand

Hint:

Monetarists believe that the natural rate of unemployment and output is determined by real factors like capital stock, labor force size, and technology, not by aggregate demand.

Answer 1

The Correct Option is D

Topic: Monetarist Macroeconomics
Understanding the Question: In the Monetarist view (Milton Friedman), what factor does NOT influence the long-run "natural" state of the economy?
Key Formulas and Approach: The Long-Run Aggregate Supply (LRAS) is vertical. It is determined by supply-side (real) factors, not demand-side (nominal) factors.
Detailed Solution:
Step 1: Identify the Natural Rate. The natural rate of output is determined by the economy's productive capacity.
Step 2: Examine Real Factors. Capital stock (A), Labor force (B), and Technology (C) are "real" variables that shift the LRAS curve. They determine how much an economy can produce.
Step 3: Examine Nominal Factors. Aggregate Demand (D) is influenced by the money supply. Monetarists believe that while AD can cause short-term ripples, it cannot change the long-term structural natural rate.
Conclusion: Aggregate demand (D) does not determine the natural rate.