Given the expected price level,policies for reaching potential GDP will work best if the money supply is
A)large,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)large enough that prices at potential GDP are above expectations and firms can afford to hire workers
C)small,so that prices at potential GDP are below expectations and people can afford to buy enough goods to support the natural level of employment
D)small,so that prices at potential GDP are above expectations and firms can afford to hire the workers
E)exactly the size that makes prices equal to the prices people expected to prevail

Question

Quizplus · Accepted Answer

The best policy for reaching potential GDP is one that keeps prices stable and equal to what people expect. This means that the money supply should be exactly the size that makes prices equal to the prices people expected to prevail. If prices are too high, firms will not be able to afford to hire enough workers to reach potential GDP, and if prices are too low, people will not be able to afford to buy enough goods to support the natural level of employment. Therefore, the best choice is E.

Given the Expected Price Level,policies for Reaching Potential GDP Will