The traditional monetary rule is the idea that
A) the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP.
B) the annual rate of increase in the money supply should be equal to the long-term increase in the price level.
C) an expansionary ﬁscal policy should always be accompanied by an easy monetary policy.
D) monetary policy only affects the economy 6 to 9 months after the money supply is changed.

Question

Quizplus · Accepted Answer

The traditional monetary rule is based on the idea that the long-run price level is determined by the money supply, so an increase in the money supply will eventually lead to an increase in the price level. Therefore, the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP, in order to maintain a stable price level over the long run. Option B is incorrect because it suggests that an increase in the money supply will always lead to an increase in the price level, which is not necessarily true in the short run. Option C is also incorrect because an expansionary fiscal policy does not always require an easy monetary policy, depending on the specific economic conditions. Option D is incorrect because monetary policy can affect the economy immediately in some cases.

The Traditional Monetary Rule Is the Idea That