Milton Friedman discussed the possibility of setting the marginal social cost of printing one more unit of money to zero, implying that the real interest rate should be equal to the rate of deflation in the economy, but not everyone agreed with this. What reasoning did Phelps (1973) provide to argue against Friedman's rule? Which interpretation would be correct in the RBC model? Why?

Answer and Explanation:

Phelps criticized Friedman's position, because he said it was totally irrelevant to analyze the tax functions of inflation without assessing product demand, as Friedman suggested in his theory. He stated that this would only be possible if there was a way to predict an optimal rate of inflation in different situations of demand and supply, otherwise, in Phelps' words it would be the same as "Professor Friedman gave us Hamlet without a prince".

Phelps' positioning would be better considered by the RBC model, since this model is based on real and not imaginary facts.

the federal government of the united states was established by the constitution. us is a presidential republic. the president is head of state, head of government and of a two party legislative and electoral system. the supreme court balances the powers of the federal and the state government. yhe executive branch is headed by the oresident. there are two chambers of congress, the senate and the house of representatives. judicial power is exercised by the judicial branch (or judiciary), comprised of the supreme court and lower federal courts. the judiciary's function is to interpret the   constitution as well as the federal laws and regulations.

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