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IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history

Monetarist economists of the Friedman school argued that, in the long run, a sustained rise in the money supply well above the growth of real output would mainly result in which of the following?

Monetarists held that excessive money growth relative to real output growth leads mainly to inflation. With stable velocity and output set by real supply-side factors in the long run, extra money cannot raise real output permanently and only pushes up the price level.

  1. AA permanent increase in real output and employment
  2. BA higher general price level, i.e. inflationCorrect
  3. CA permanent fall in the velocity of circulation to offset it
  4. DA lower natural rate of unemployment
  5. A fall in nominal interest rates indefinitely

Explanation

Monetarists rely on the quantity theory MV = PT. With velocity stable and real output determined by supply-side factors, faster money growth than output growth feeds through to prices. Real output is not permanently raised, so the first option is wrong.

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