Assume monetary equilibrium exists; that is, the desired and actual supply of money are equal. Also assume that nominal GDP equals $960 billion and the money supply is $160 billion. From a strict
Monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by
A) $13 billion.
B) $24 billion.
C) $72 billion.
D) $80 billion.

Question

Quizplus · Accepted Answer

Monetarists, following the Quantity Theory of Money, believe that changes in the money supply have a direct, proportional effect on nominal GDP. The velocity of money (V) is the rate at which money circulates in the economy and is calculated as V = Nominal GDP / Money Supply. In this case, V = $960 billion / $160 billion = 6. An increase in the money supply by $12 billion, assuming velocity remains constant, would increase nominal GDP by 6 times $12 billion, which equals $72 billion.

Assume Monetary Equilibrium Exists; That Is, the Desired and Actual