Question 3 [30 marks]

What is wrong in the following reasoning?

"Economists universally accept the Model of Money Supply. The key point made by this model is that

where: M= mm x b

However, the statistics about the Great Depression of the 1930s patently contradicts the Model of Money Supply. Between August 1929 and March 1933, the monetary base rose by 18 per cent and the money supply fell 28 per cent in the United States. Nevertheless, the money multiplier is always greater than one. Therefore, it is impossible to reconcile the Model of Money Supply and the monetary statistics concerning the money supply of the period August 1929 - March 1933."