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 advocates for an annual increase in the money supply that matches the potential long-term growth rate of the real GDP. This approach serves to stabilize the price levels and reduce the risk of inflation. The alternative option (B) suggests targeting the long-term increase in the price level, which may not be the most optimal choice since this disregards the potential growth of the economy. Option (C) is not part of the traditional monetary policy, and option (D) is an inaccurate statement.

The Traditional Monetary Rule Is the Idea That