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(c) fiscal policy is at best irrelevant and at worst positively harmful. It can by definition have no effect on the level of full-employment output, simply changing its composition by crowding out’ private-sector output. Insofar as it is financed by increasing the money supply it will cause inflation.

(d) The demand for money depends on real output and the real interest rate in a stable, predictable way. This is the modern extension of the assumption underlying the simple’ quantity theory of money that the velocity of circulation is a constant. In effect it is saying that the latter may vary, but in a way which can be explained and predicted in terms of interest rate and income changes.

(e) The money supply is controllable: it is possible for a monetary authority such as the bank of England to determine its level and rate of growth.

(f) Because in the long-run output is independent of the money supply (as well as fiscal policy), the policy which should be adopted is to allow the money supply to grow at the same rate as the growth of output. This will ensure growth without inflation, since the quantity

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