If policymakers are expected to increase the money supply, Monetarists argue that there is __________ effect. There is __________ effect that raises prices when the money supply actually increases.

Question

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Monetarists argue that increasing the money supply has no real effect on the economy, except to potentially cause inflation by increasing the amount of money chasing after the same amount of goods and services. This is known as the Quantity Theory of Money, which states that the overall price level is directly proportional to the amount of money in circulation. Therefore, when the money supply actually increases, Monetarists argue that there is an income effect that raises prices.

If Policymakers Are Expected to Increase the Money Supply, Monetarists