Question

Consider the following: Two researchers, \(\mathrm{A}\) and \(\mathrm{B}\), are trying to determine whether eating fatty foods leads to heart attacks. The researchers proceed differently. Researcher A builds a model in which fatty foods may first affect \(\mathrm{X}\) in one's body, and if \(\mathrm{X}\) is affected, then \(\mathrm{Y}\) may be affected, and if \(\mathrm{Y}\) is affected, then \(\mathrm{Z}\) may be affected. Finally, if \(Z\) is affected, the heart is affected, and the individual has an increased probability of suffering a heart attack. Researcher B doesn't proceed in this step-by-step fashion. She conducts an experiment to see whether people who eat many fatty foods have more, fewer, or the same number of heart attacks as people who eat few fatty foods. Which researcher's methods have more in common with the research methodology implicit in the Keynesian transmission mechanism? Which researcher's methods have more in common with the research methodology implicit in the monetarist transmission mechanism? Explain your answer.

Short answer

Researcher A's methods align more with the research methodology implicit in the Keynesian transmission mechanism due to its step-by-step approach, while Researcher B's methods are more similar to the research methodology implicit in the monetarist transmission mechanism due to its focus on a direct relationship.

Step-by-step solution

Understand Economic Theories

Firstly, let's understand the relevant economic concepts. The Keynesian transmission mechanism suggests that changes in aggregate demand have continuous and chain reaction impacts throughout the economy. On the other hand, Monetarist theory presumes a much more direct relationship between changes in the money supply and the overall economy.

Analyze Researcher A

Next, analyze Researcher A's methodology. She builds a model with a chain of effects: eating fatty foods might impact X, X might impact Y, Y might impact Z, and Z might ultimately lead to a heart attack. This process resembles the Keynesian theory's mechanism, where a change goes through multiple links in a chain before reaching the final outcome.

Analyze Researcher B

Third, analyze Researcher B's methodology. She directly compares the heart attack rates between people who consume many fatty foods and those who consume fewer fatty foods. This is similar to the Monetarist theory, which suggests a direct relationship between two factors.

Conclude

In the final step, integrate the findings from the previous steps. Researcher A's methodology aligns more with the Keynesian transmission mechanism due to the step-by-step chain of potential impacts. Researcher B's method aligns more with the monetarist transmission mechanism as she investigates a direct relationship between diet and heart attacks, without intervening factors.

Key concepts

Keynesian Transmission Mechanism

The Keynesian transmission mechanism is at the heart of Keynesian economics, which emphasizes how shifts in aggregate demand can trigger a series of effects that influence economic activity. To simplify, imagine our economy as a domino setup, where pushing the first domino represents a change in fiscal or monetary policy. As one domino falls, it nudges the next, creating a ripple effect. This exemplifies how, in a Keynesian view, spending increases by governments or reductions in taxes can enhance consumer demand, leading to more production, employment, income, and so further spending, in a virtuous cycle.

Let's relate this to our researchers' methods. Researcher A's approach, where one effect leads to another in a stepped sequence (from fatty foods to X, from X to Y, and so on), mirrors this Keynesian idea. Each stage in the model is interdependent, much like how Keynesians see the economy, where components like investment, consumption, and output are connected in a complex reaction chain.

Monetarist Theory

Monetarist theory, pioneered by Milton Friedman, stakes the claim that the primary driver of economic change is variations in the money supply. Monetarists argue for a more direct linkage between the amount of money in an economy and its performance, unlike the Keynesian emphasis on aggregate demand. They suggest that an increased money supply leads directly to inflation if not matched by economic growth.

In our case, Researcher B's experiment, which looks for a straightforward connection between fatty food consumption and heart attacks, is akin to this theory's direct cause-and-effect perspective. The monetarist approach values empirical data and observations to understand the impacts of changes in money supply over the theoretical models that predict numerous intermediate effects.

Aggregate Demand

Aggregate demand is the total demand for finished goods and services in an economy at a specific time and price level. It represents the sum of all spending by households, businesses, the government, and foreign buyers on the nation's goods and services. A useful analogy is to think of aggregate demand as a nation's total shopping list, where everything households and businesses plan to buy, from a car to computer services, is included.

Keynesian economics pays close attention to how factors like government spending and consumer confidence can shift this 'shopping list' and, thus, the total economic activity. An increase in aggregate demand can lead to higher output and employment in the short term. This concept is central to understanding the Keynesian transmission mechanism and how policy measures are believed to influence the broader economy.

Money Supply

The phrase 'money supply' refers to the total amount of currency that is available within an economy at any given time. This includes cash held by the public plus balances held at banks and other financial institutions. A central bank can influence this by adjusting interest rates or through open market operations where it buys or sells government securities.

Monetarist theory places the spotlight on money supply as the key player in economic stability. Monetarists assert that variations in the money supply have a significant, often immediate, impact on inflation and economic growth. Controlling these fluctuations, therefore, is a crucial part of maintaining a healthy economy.