AP Macroeconomics Question 57: Answer and Explanation

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Question: 57

7. It is a monetarist point of view that

  • A. monetary policy should be used to fine-tune the economy
  • B. crowding out is not a problem
  • C. the money supply should be increased steadily
  • D. the velocity of money is unstable
  • E. the economy is inherently unstable

Correct Answer: C


C Monetarists suggest that the use of monetary policy to fine-tune the economy could be destabilizing. They also believe that the crowding out of private investment due to increased interest rates substantially weakens fiscal policy. They see velocity and the economy in general to be relatively stable. Monetarists favor steadily increasing the money supply at a rate equal to the growth in real output rather than active fiscal or monetary policy.