When he was the U.S. Federal Reserve chairman, Ben Bernanke said that financial innovation and the spread of U.S. currency throughout the world had broken down the relationships between money, inflation, and output growth, which made monetary aggregates less useful gauges for policy makers. Some other central banks use monetary aggregates as a guide to policy decisions, but Bernanke believed reliance on monetary aggregates would be unwise. He said that there are differences between the United States and Europe in terms of the stability of money demand.

a. Explain how the debate surrounding the quantity theory of money could make “monetary gauges a less useful tool for policy makers.”

b. What do Ben Bernanke’s statements reveal about his view on the accuracy of the quantity theory of money?