Consider Figure 18-5.

a. If the Federal Reserve had pursued a monetarist policy of a constant rate of growth in the money supply, what would have happened to output beginning in 2008 according to the velocity equation?

b. In fact, the Federal Reserve accelerated the rate of growth in M1 rapidly beginning in 2008, partly in order to counteract a large increase in unemployment.

Would a monetarist have agreed with this policy? What limits are there, according to a monetarist point of view, to changing the unemployment rate?

Figure 18-5

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From 1960 to 1980, the velocity of money was stable, leading monetarists to believe that steady growth in the money supply would lead to a stable economy. After 1980, however, velocity began moving erratically, undermining the case for traditional monetarism. As a result, traditional monetarism fell out of favor. Source: Federal Reserve Bank of St. Louis. Velocity of M1 12 10 8 6 s T 1960 Until 1980, velocity followed a smooth trend. 1970 After 1980, velocity changed erratically. 1980 1990 2000 2010 2014 Year