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Chapter 19: Q4. (page 405)

If the money supply fell by 10 per cent, a monetarist would expect nominal GDP to __________.

a. rise

b. fall

c. stay the same

Short Answer

Expert verified

The correct option is (b): fall.

Step by step solution

01

Explanation

According to the monetarists, the change in money supply is directly proportional to the change in nominal GDP. It means that if the money supply increases (decreases), the nominal GDP will increase (decrease). In the question, the money supply is decreasing. Hence, the monetarist would expect the nominal GDP also to fall.

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Most popular questions from this chapter

Use an AD-AS graph to demonstrate and explain the price-level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) Then demonstrate and explain on the same graph the outcome as viewed by mainstream economists.

Assume the following information for a hypothetical economy in year 1: money supply = $400 billion; long-term annual growth of potential GDP = 3 percent; velocity = 4. Assume that the banking system initially has no excess reserves and that the reserve requirement is 10 percent. Also suppose that velocity is constant and that the economy initially is operating at its full-employment real output.

  1. What is the level of nominal GDP in year 1?

  2. Suppose the Fed adheres to a monetary rule through open-market operations. What amount of U.S. securities will it have to sell to, or buy from, banks or the public between years 1 and 2 to meet its monetary rule?

According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream economists?

First, imagine that both input prices and output prices are fixed in the economy. What does the aggregate supply curve look like? If AD decreases in this situation, what will happen to equilibrium output and the price level? Next, imagine that input prices are fixed, but output prices are flexible. What does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? Finally, if both input prices and output prices are fully flexible, what does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level?

Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists. Explain: “The problem with a balanced-budget amendment is that it would, in a sense, require active fiscal policy—but in the wrong direction—as the economy slides into recession.”
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