Given the expected price level, what size of money supply will best facilitate policies for the achievement of potential GDP?
A) a large money supply, so that prices at potential GDP are below expectations and people can afford to buy enough goods to support the natural level of employment
B) a large enough money supply that prices at potential GDP are above expectations and firms can afford to hire workers
C) a small money supply, so that prices at potential GDP are above expectations and firms can afford to hire the workers
D) a money supply that is exactly the size needed to make prices equal to the prices people expect to prevail

Question

Given the expected price level, what size of money supply will best facilitate policies for the achievement of potential GDP?  
A) a large money supply, so that prices at potential GDP are below expectations and people can afford to buy enough goods to support the natural level of employment 
B) a large enough money supply that prices at potential GDP are above expectations and firms can afford to hire workers 
C) a small money supply, so that prices at potential GDP are above expectations and firms can afford to hire the workers 
D) a money supply that is exactly the size needed to make prices equal to the prices people expect to prevail

Quizplus · Accepted Answer

The best choice is a money supply that is exactly the size needed to make prices equal to the prices people expect to prevail. This is because at potential GDP, prices are in equilibrium and neither firms nor consumers are disadvantaged. If the money supply is larger or smaller than what is needed, it creates distortions in the economy and makes it more difficult to achieve potential GDP.

Given the Expected Price Level, What Size of Money Supply