For interest rates to remain stable during economic expansions,the growth rate of the money supply should
A)exceed the growth in the demand for money
B)just match the growth in the demand for money
C)be less than the growth in the demand for money
D)be zero
E)just match the growth in nominal GDP

Question

Quizplus · Accepted Answer

If the growth rate of the money supply just matches the growth in the demand for money, then interest rates are likely to remain stable during economic expansions. If the growth rate of the money supply exceeds the growth in the demand for money, then there will be an increase in inflation and possibly higher interest rates. If the growth rate of the money supply is less than the growth in the demand for money, then there will be a decrease in inflation and possibly lower interest rates. If the growth rate of the money supply is zero, then it could lead to a decrease in economic activity and possibly deflation. Matching the growth in the demand for money helps to maintain stability in the economy while also avoiding inflation and deflation. Matching the growth in nominal GDP could also be an option, but it is not as precise as matching the growth in the demand for money.

For Interest Rates to Remain Stable During Economic Expansions,the Growth