Economics • Economic BasicsHard
What does the 'Monetary Rule' proposed by Milton Friedman primarily advocate for macroeconomic stability?
A. Discretionary adjustments of interest rates by the central bank based on inflation forecasts
B. A constant, predictable annual growth rate of the money supply matching long-term economic growth✓ Correct Answer
C. A strict pegging of the domestic currency to a basket of hard international reserve currencies
D. Complete elimination of commercial banking credit creation through 100 percent reserve requirements
💡 Solution & Explanation
Milton Friedman propounded the monetary rule, famously known as the k-percent rule, which posits that central banks should expand the money supply at a steady, predetermined annual rate aligned with real GDP growth to ensure price stability. Discretionary monetary policies and currency pegging represent alternative paradigms that Friedman argued often exacerbate macroeconomic volatility. Monetarism remains a cornerstone topic in monetary economics for competitive examinations.
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