Which macroeconomic school of thought holds that if the long-run growth of real GDP is 3%, the money supply should grow at 3%?

• A. classical economics
• B. monetarism
• C. the Great Moderation consensus
• D. Keynesianism

Answer: (B)

Monetarism emphasizes that the growth rate of the money supply should align with the growth rate of the economy’s real output to keep inflation stable over the long run. Using the quantity equation MV = PY, if velocity is roughly stable, a real GDP growth rate of 3% means the price level stays stable only if the money supply grows about 3% as well. When money grows faster than real output, inflation tends to rise; when it grows more slowly, prices fall or deflation can occur. This rule-based view of money and prices is what makes monetarism the best fit for the statement. Other schools discuss inflation and unemployment differently, but monetarists specifically advocate a steady money growth path that tracks real GDP growth to maintain price stability.