At the end of the third quarter of 2015, the money supply in the U.S. was $2 trillion. That is, the available currency and deposits in the U.S. during July, August, and September 2015 was two trillion dollars. Also, during the third quarter of 2015, U.S. nominal GDP was $16 trillion and U.S. real GDP was $13 trillion.
Monetary Neutrality is a theory in macroeconomics that states when the central bank conducts monetary policy, the central bank does not affect the real economy (e.g., the number jobs, the size and growth of output, the amount of investment). Instead, any change in the money supply would be offset by a proportional change in prices and wages. Monetary neutrality underlies the quantity theory of money. Suppose that throughout the fourth quarter of 2015, the Federal Reserve enacted a bond buying program. If monetary neutrality holds, then which of the answer choices is correct?
A. During the fourth quarter of 2015, the Fed conducted a contractionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply decreased, and U.S. nominal GDP decreased.
B. During the fourth quarter of 2015, the Fed conducted a contractionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply decreased, and U.S. nominal GDP was unchanged since it is not affected by changes in monetary policy.
C. During the fourth quarter of 2015, the Fed conducted an expansionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply increased, and U.S. nominal GDP increased.
D. During the fourth quarter of 2015, the Fed conducted an expansionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply increased, and U.S. nominal GDP was unchanged since it is not affected by changes in monetary policy.