Question

Monetarists say: A. Because P is stable, a change in M will change Q proportionately in the opposite direction.

B. A change in the money supply will change aggregate demand and therefore nominal GDP.
C. A change in the money supply will change velocity, which in turn will change nominal GDP.
D. A change in the money supply will change the interest rate, which will change investment spending and nominal GDP.

Answer 1

Monetarists believe that if velocity is constant, changes in the money supply directly affect nominal GDP. The impact is predictable only if velocity changes in a predictable manner. Unpredictable changes in velocity complicate the relationship between money supply alterations and nominal GDP.

Step-by-step explanation:

Monetarists hold specific views regarding the relationship between the money supply and nominal GDP. The key concept is the quantity equation of money, which is expressed as Money supply (M) x Velocity (V) = Nominal GDP. When velocity is constant, a change in the money supply will result in a proportional change in nominal GDP.

This change in nominal GDP can manifest as an increase in inflation, a rise in real GDP, or some combination of both. If velocity is changing in a constant and predictable manner, then the impact of money supply changes on nominal GDP remains predictable. However, if velocity changes unpredictably, the effects of money supply changes on nominal GDP become uncertain, complicating monetary policy decisions.