The quantity theory of money builds on the equation of exchange. What specific assumptions are made that turn the equation of exchange from an accounting identity into an economic theory?
The principal assumption is that velocity is predictable enough so that change in the money supply will cause specific and predictable changes in nominal GDP. Therefore, if the economy is growing at a specific rate, an increase in the money supply of a given percentage will increase prices by the same amount and nominal GDP by the sum of the growth percentage and the money supply increase percentage. The crucial assumption is that velocity is either stable or predictable and therefore, there is a behavioral relationship between money and prices.
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Refer to Table 22-7. Consider the statistics in the table above in describing the following industrialized and developing countries. Are these consistent with the economic growth model? Briefly explain
What will be an ideal response?
A set of indifference curves that are only slightly bowed inward represent goods that could best be described as
a. perfect substitutes. b. perfect complements. c. very close substitutes. d. very close complements.
When the Fed buys or sells government bonds to private banks in exchange for reserves, it is referred to as:
A) the Fed's dual mandate. B) open market operations. C) reserve targeting. D) moral suasion.
Complementary goods are goods people consume together, such as peanut butter and jelly. If the price of peanut butter falls, we predict
A) the demand for peanut butter would increase. B) the demand for jelly would increase. C) the demand for peanut butter would decrease. D) the demand for jelly would decrease.