If the money supply is growing at a constant rate of 2% and the economy undergoes a negative demand shock, the theory of monetarism recommends:
A) coordinating a monetary expansion with a fiscal expansion to increase aggregate demand.
B) raising the growth rate of money supply to 3% to lower the interest rate.
C) lowering the growth rate of money supply to 1% to increase saving.
D) maintaining the growth rate of money supply at 2% and letting the aggregate price level fall.

Question

Quizplus · Accepted Answer

Monetarism recommends maintaining a steady growth rate of the money supply regardless of demand shocks. Therefore, the best choice in this situation is to maintain the growth rate of money supply at 2% and let the aggregate price level fall to adjust to the decrease in demand. This is in line with the theory of the quantity theory of money, which states that changes in the money supply affect only the price level in the long run, not real output or employment.

If the Money Supply Is Growing at a Constant Rate