Question

Given the Monetarists assumptions, a decrease in M will

a. increase V.

b. increase P.

c. increase Q.

d. decrease P.

e. decrease Q.

Answer 1

ans=b=increase P

Pivotal to monetarism is the ‘Quantity Theory of Money’, that says that the supply of money multiplied by the rate at which funds are spent per annum equals the nominal expenses in the economy. The formula is :

MV = PQ

Monetarist thinkers view velocity as a given, implying that the supply of money is the chief factor of GDP growth. Economic growth is a function of rate of inflation (P) & economic activity (Q). If V is remains unchanged & is predictable, then an increase in M will lead to an increase in either P / Q. An increase in the level of price denotes that the quantity of commodities produced will stay constant, whilst an increase in the quantity of products produced implies that the average price level will be comparatively constant. According to monetarism, variations in supply of money will impact price levels over the long run and economic output in the short run. A change in supply of money, thus, will directly determine level of prices, production, and rate of employment