A very simple monetary rule might be: Increase the money supply at the rate of growth of

Question:

A very simple monetary rule might be: “Increase the money supply at the rate of growth of real GDP.”
a. What would be the advantages of this monetary rule? What would be the problems?
b. What if the rule said, “Increase the money supply at the rate of growth of real GDP plus 2%?” Then what would be the advantages and problems?
c. What if the rule said, “Increase the money supply at the rate of growth of real GDP plus 2% plus one-half of the output gap?” Then what would be the advantages and problems?