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)increase government expenditures.
B)continue allowing the quantity of money to grow at "k" percent.
C)increase the quantity of money more than usual.
D)lower the federal funds rate.
E)raise the federal funds rate.

Question

Quizplus · Accepted Answer

Friedman's k-percent rule suggests that the central bank should increase the money supply at a constant rate, regardless of economic fluctuations. Therefore, the Fed would continue to allow the money supply to grow at the predetermined "k" percent rate.

Consumer Confidence in the Economy Falls, and as a Result