Chapter 14: Problem 7

According to monetarism, an increase in the money supply will lead to a rise in Real GDP in the long run. Do you agree or disagree with this statement? Explain your answer.

Short Answer

Expert verified

From a monetarist perspective, it could be disagreed with the statement that an increase in the money supply will lead to a rise in Real GDP in the long run, instead, it may cause inflation.

Step by step solution

Understanding the question

The first step is to understand what the exercise is asking. The exercise is asking whether an increase in the money supply will lead to a rise in Real GDP in the long run, according to the theory of monetarism.

Understanding Monetarism

Monetarism is an economic theory that emphasises the role of government's control of the money supply in controlling inflation and managing the economy. According to this theory, increasing the money supply could stimulate economic growth in the short run, but only lead to inflation in the long run, as more money chases the same amount of goods and services.

Relating Money Supply to Real GDP

By examining the monetarist theory, it can be inferred that an increase in the money supply will initially stimulate economic activity and therefore increase Real GDP. However, in the long run, this increase in the money supply will only lead to inflation and not necessarily a consistent increase in Real GDP.

Formulating the Response

Based on the understanding of monetarism and its effects on the economy in the long run, it could be disagreed with the statement that an increase in the money supply will lead to a rise in Real GDP in the long run. The explanation would be along the lines of Monetarist Theory, which stipulates that excessive expansion of the money supply will in the long run lead primarily to inflation, rather than a persistent increase in real GDP.

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