Which statement best captures monetarist belief about money supply and GDP growth?

• A. Short-run problems unlikely to occur
• B. GDP will grow steadily if the money supply grows steadily
• C. Fluctuations in GDP are less pronounced when the Fed engages in discretionary monetary policy
• D. People base inflation expectations on all available information

Answer: (B)

Monetarists stress that the path of the money supply shapes nominal outcomes and that a stable, predictable growth of money helps the economy move along a steady path. With a steady money growth rule, the growth rate of nominal spending (and thus nominal GDP) tends to be smooth, provided velocity doesn’t swing wildly. Real GDP, determined by real factors like technology and resources, tends to grow at a more stable pace when the money path isn’t sending large, unexpected inflation surprises. So, if the money supply grows steadily, the economy is expected to experience steady GDP growth rather than volatile swings.

The other ideas mix in notions that don’t align with their view. Discretionary policy often introduces surprises and lags that can amplify fluctuations rather than dampen them. The notion that people base inflation expectations on all available information leans more toward rational-expectations thinking, not the money-growth emphasis that monetarists highlight. And while long-run neutrality says money mainly affects the price level, the essence of a steady money growth rule is that it supports a predictable, steady growth path for GDP, which is what this statement captures.