Consumer confidence in the economy falls, and as a result, aggregate demand decreases. As real GDP falls below potential GDP, if the Fed followed Friedman's k- percent rule, the Fed would
A) continue allowing the quantity of money to grow at "k" percent.
B) increase the quantity of money more than usual.
C) increase government expenditures.
D) lower the federal funds rate.

Question

Quizplus · Accepted Answer

According to Friedman's k-percent rule, the central bank should increase the quantity of money supply in the economy at a constant rate of "k" percent every year. Therefore, even if the consumer confidence falls and aggregate demand decreases, the Fed should continue following the k-percent rule and let the money supply grow at the same rate. This will help stabilize prices and avoid deflation. Hence, the correct answer is A. The other options are not relevant to the k-percent rule.

Consumer Confidence in the Economy Falls, and as a Result