If the economy's real output is growing by 2.5 percent a year, then, in order to maintain price stability, a monetarist would most likely recommend that money supply should be
A) held constant.
B) decreased by 1 percent a year.
C) increased by 2.5 percent a year.
D) increased by 7.5 percent a year.

Question

Quizplus · Accepted Answer

Monetarists, such as Milton Friedman, argue that the money supply should grow at a constant rate in line with real output to maintain price stability. If the real output is growing by 2.5 percent a year, they would recommend increasing the money supply by 2.5 percent a year to match this growth, thus maintaining price stability.

If the Economy's Real Output Is Growing by 2