Question

Suppose that in an economy, the money supply is $40, velocity is 5, the average price is $10, and output is 20. Suppose the money supply falls by half. According to the monetarist school, what is the maximum change possible for the price level and output? What factors would cause no change in output?

Answer 1

The monetarist argues that economy would be corrected through the increasing the money supply. The increase in the money supply would cause the rise in the demand.

Over the long run the output is not affected by the change in the money supply.

The change in the technology and availability of inputs would cause the rise in the output over the long run.