None of the answers is correct. 18. Milton Friedman and Anna Schwartz argued in

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None of the answers is correct.

18. Milton Friedman and Anna Schwartz argued in the last chapter of A Monetary History of the United States that a shift in money growth will usually cause velocity to shift in the same direction. So, higher money growth causes optimism, and slower growth causes pessimism. If velocity does tend to move in the direction of money growth, how does this change the Fed's response to economic shocks? The Fed should make bigger moves in money growth. The Fed should make smaller moves in money growth. This should not change the Fed's response to economic shocks.

None of the answers is correct.

Explanation / Answer

Answer.) The Fed should make smaller moves in money growth.

If velocity moves in the same direction as money growth, then the Fed will take smaller steps than otherwise: Velocity growth will do some of the work of money growth.

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