If only unanticipated changes in the money supply affect real GDP, the public has rational expectations, and everyone has the same information about the state of the economy, then:
A) monetary policy can be used to systematically stabilize output.
B) monetary policy cannot be used to systematically stabilize output.
C) a policy of keeping the money supply constant is optimal.
D) a policy of adjusting the money supply in response to the state of the economy is optimal.

Question

Quizplus · Accepted Answer

If only unanticipated changes in the money supply affect real GDP, then monetary policy cannot be used to systematically stabilize output. This is because the effects of monetary policy on output would be unpredictable and could even be counterproductive if the public has rational expectations and everyone has the same information about the state of the economy. In this scenario, the best policy may be to keep the money supply constant or to adjust it in response to other goals, such as price stability or financial stability.

If Only Unanticipated Changes in the Money Supply Affect Real