Assume monetary equilibrium exists-that is, the desired and the actual supply of money are equal -when nominal GDP equals $480 billion and the money supply is $160 billion. According to a strict
Monetarist view, an increase in the money supply of $10 billion will increase the nominal GDP by
A) $30 billion.
B) $25 billion.
C) $20 billion.
D) $10 billion.

Question

Quizplus · Accepted Answer

The Monetarist view, particularly associated with Milton Friedman, posits a direct relationship between changes in the money supply and changes in nominal GDP, assuming velocity of money (V) and real output (Y) are constant. The initial money supply is $160 billion, and nominal GDP is $480 billion, implying a velocity (V = GDP/M) of 3. An increase in the money supply by $10 billion, with a constant velocity, would increase nominal GDP by 3 times the increase in the money supply, hence $30 billion.

Assume Monetary Equilibrium Exists-That Is, the Desired and the Actual