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

According to the strict monetarist view, the velocity of money is constant. If the money supply increases by $10 billion, nominal GDP will increase proportionally. The original ratio of nominal GDP to money supply is 480/160 = 3. Therefore, an increase of $10 billion in the money supply will increase nominal GDP by 3 times $10 billion, which is $30 billion.

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