The monetarists would expect a tax cut to have a strong effect on output only if the spending increase was
A)financed by a sale of bonds.
B)financed by a cut in government spending.
C)financed by an increase in the money stock.
D)accompanied by a reduction in the deficit.

Question

Quizplus · Accepted Answer

Monetarists believe that changes in the money supply are the primary driver of changes in the economy. Therefore, they would expect a tax cut to have a strong effect on output only if it is financed by an increase in the money stock. This would increase the overall level of spending in the economy, which would in turn increase output. Financing the tax cut by a sale of bonds or a reduction in the deficit would not necessarily increase spending, while financing it by a cut in government spending would actually decrease spending, leading to a reduction in output.

The Monetarists Would Expect a Tax Cut to Have a Strong