Monetarists say
A) that, because P is stable, a change in M will change Q proportionately in the opposite direction.
B) a change in the money supply will change aggregate demand and therefore nominal GDP.
C) a change in the money supply will change velocity, which in turn will change nominal GDP.
D) a change in the money supply will change the interest rate, which will change investment spending and nominal GDP.

Question

Quizplus · Accepted Answer

Monetarists believe that changes in the money supply will have a direct effect on aggregate demand, which will in turn affect nominal GDP. They argue that the relationship between the money supply and nominal GDP is direct and proportional, meaning that a change in the money supply will lead to a corresponding change in nominal GDP. This is known as the quantity theory of money. Monetarists do not necessarily believe that P (the price level) is stable, so choice A is incorrect. While velocity (the speed at which money circulates through the economy) does play a role in the monetarist model, it is not the primary driver of changes in nominal GDP, so choice C is not the best answer. Finally, while changes in the interest rate do affect investment spending, monetarists do not typically emphasize this relationship as strongly as they do the relationship between the money supply and aggregate demand, so choice D is not the best answer either.

Monetarists Say