Question

If bond yields rise by 1% and the return on money rises by 1%, the predictions for the change in money demand made by Keynes's and Friedman's models are the same.?

True or false?

Answer 1

True. This is because the monetarists(Friedman) believe that money supply curve is almost and is thus inelastic in nature, whereas Keynes thought that an economy is usually dependent on demand for consumption, which in turn leads to the demand for money. In the given case, if 1% increase in bond interest rate leads to 1% rises for money, and thus both the models are now consistent with each other because now the Friedman's money supply curve will also be elastic, while Keynes money supply curve is already unit elastic. Thus, in this case Keynes and Friedman's predictions should be same.