A fixed money-supply rule will have the greatest stabilizing effect on output when

Question

Quizplus · Accepted Answer

A fixed money-supply rule can help stabilize output when both money demand and commodity demand are stable because it creates predictability and a consistent monetary environment for economic agents. If money demand or commodity demand were unstable, a fixed money supply rule could exacerbate fluctuations in output. Additionally, the instability of the velocity of money would make it difficult for a fixed money-supply rule to have a stabilizing effect on output as changes in velocity would lead to changes in nominal GDP. Thus, the best choice is C.

A Fixed Money-Supply Rule Will Have the Greatest Stabilizing Effect