Monetarists claim that ________ models ignore important transmission mechanisms and therefore ________ the importance of the effects of monetary policy on the economy.
A)structural; overstate
B)reduced-form; overstate
C)reduced-form; understate
D)structural; understate

Question

Quizplus · Accepted Answer

Monetarists argue that structural economic models, which consider the underlying factors affecting the economy such as production and consumption, provide a more accurate representation of the economy than reduced-form models, which focus solely on the relationships between variables. Monetarists claim that reduced-form models tend to understate the importance of the effects of monetary policy on the economy because they ignore important transmission mechanisms, such as changes in interest rates and credit availability. Therefore, the correct choice is (D) structural; understate.

Monetarists Claim That ________ Models Ignore Important Transmission Mechanisms and Therefore