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

Question

Quizplus · Accepted Answer

According to Friedman's k-percent rule, the Fed should continue to allow the quantity of money to grow at a steady rate of "k" percent regardless of changes in the economy or consumer confidence. The rule aims to provide stability to the economy and prevent inflation caused by excessive money growth. Therefore, in this scenario, the Fed should maintain the k-percent rule to ensure a steady growth rate of the money supply, which can help stabilize the economy and prevent further decreases in aggregate demand.

Consumer Confidence in the Economy Falls, and as a Result