The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the
A) monetary rule.
B) velocity of money.
C) equation of exchange.
D) crowding-out effect.

Question

Quizplus · Accepted Answer

This statement refers to the monetary rule, which suggests that a stable monetary policy would maintain a constant annual growth rate of the money supply equal to the potential annual growth rate of real GDP to avoid inflation or deflation. This rule is based on the Quantity Theory of Money, which is represented by the equation of exchange (MV = PQ), where M is the money supply, V is the velocity of money, P is the price level, and Q is real output or transactions. The velocity of money and crowding-out effect are not directly related to this statement.

The Notion That the Annual Rate of Increase in the Money