Suppose that several European countries enter a recession, decreasing U.S. exports. As U.S. real GDP drops below potential GDP, if the Fed followed Friedman's k- percent rule, the Fed would
A) increase the quantity of money more than usual.
B) reduce tariffs.
C) raise the federal funds rate.
D) continue allowing the quantity of money to grow at "k" percent.

Question

Quizplus · Accepted Answer

According to Friedman's k-percent rule, the Fed should continue allowing the quantity of money to grow at a steady rate of "k" percent regardless of the state of the economy. Therefore, in the case of a recession caused by a decrease in U.S. exports, the Fed should continue with its usual policy of increasing the quantity of money at a steady rate of "k" percent. This should help stabilize the economy and prevent further declines in real GDP. The other options, such as reducing tariffs or raising the federal funds rate, may have some impact on the economy, but they are not consistent with Friedman's k-percent rule.

Suppose That Several European Countries Enter a Recession, Decreasing U