Final answer:
The assertion that changes in the money supply are the primary cause of changes in real output is false. The money supply is one of many factors that influence real output, and central banks typically use a multifaceted approach to manage the economy, considering both inflation and unemployment threats.
Step-by-step explanation:
The view that changes in the money supply is the primary cause of changes in real output is false. There are various factors that can influence real output including technology, consumer preferences, regulatory environment, and productivity alongside changes in the money supply. While it is true that changes in the money supply can influence real output through mechanisms such as the interest rate, credit availability, and price levels, universal generalizations about the primary cause of changes in real output overlook the complexity of the economy.
The quantity theory of money has been a repeated theme in economic thought, emphasizing that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. Indeed, as the velocity of M1 money began to fluctuate in the 1980s, many central banks shifted from targeting the growth rates of the money supply to setting monetary policy based on inflation and unemployment threats. This was because a constant money supply growth rate combined with fluctuating velocity could lead to unpredictable changes in nominal GDP.
Ultimately, while the money supply is an important tool for monetary policy and can have significant effects on the economy, it is not the sole driver of changes in real output. Economic complexities make it necessary for central banks and policymakers to consider a multifaceted approach when trying to manage economic indicators such as inflation, unemployment, and overall economic growth.