What is the equation of exchange? How can the equation of exchange be converted into the quantity theory of money?
What will be an ideal response?
The equation of exchange is MSV = PY, where MS is the money supply, V is the velocity of money, and PY is the nominal GDP. It is an accounting identity, so is not a theory. The equation of exchange becomes the quantity theory of money and prices by assuming that velocity is constant and that real GDP (Y) is stable. Then we have P = (MS)V/Y or that a change in the money supply will lead only to a proportionate change in the price level.
You might also like to view...
When does the Fed lend through discount windows?
What will be an ideal response?
If a public good was left to be provided by the private sector
A) more than the efficient quantity would be produced. B) less than the efficient quantity would be produced C) the efficient quantity would be produced D) the good would be provided at a very low price.
Refer to Figure 16-4. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?
A) an increase in the marginal income tax rate B) an increase in interest rates C) an increase in transfer payments D) an open market purchase of Treasury bills
The existence of the Federal Deposit Insurance Corporation (FDIC):
A. increases the risk of moral hazard in the savings and loan industry. B. reduces the risk of moral hazard in the savings and loan industry. C. increases the risk that customers of savings and loans will engage in moral hazard, but reduces the risk that the lenders will engage in moral hazard. D. reduces the risk that customers of savings and loans will engage in moral hazard, but increases the risk that the lenders will engage in moral hazard.