Money supply-velocity-the price level and real output

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The equation of exchange is an identity that relates the money supply, velocity, the price level, and real output.

An identity is something that is true by definition.

A. One group of economists, the monetarists, look at the equation of exchange and say that the Fed should simply increase the money supply by an annual rate equal to the long-run growth rate of the economy. Explain the effect that such a policy is likely to have on inflation.

B. Another group of economists, those who hold to the quantity theory of money, believe that V is predictable and otherwise unchangeable and that Q is steady. Is their view of the economy consistent with the Keynesian view, the classical view, or neither? Explain.

Reference no: EM131085132

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