Suppose that there is a financial crisis,and people choose to spend less.As a result,velocity drops by 5 percent.According to market monetarists,if the GDP target growth rate is 3 percent,the Fed would need to increase the money supply by ______________ percent in order to achieve their GDP target.
A) 8
B) 2
C) 4
D) 5

Question

Quizplus · Accepted Answer

Market monetarists believe in targeting the nominal GDP through adjustments in the money supply. If the velocity of money drops by 5 percent and the target GDP growth is 3 percent, the Fed would need to offset the decrease in velocity and achieve the growth target by increasing the money supply. The total adjustment needed is the sum of the drop in velocity and the GDP growth target, which is 5 percent (to counteract the drop in velocity) + 3 percent (to achieve the growth target) = 8 percent.

Suppose That There Is a Financial Crisis,and People Choose to Spend