Answer the following questions:
a. What is the equation of exchange? Explain each component.
b. What assumptions are placed on the equation of exchange to generate the quantity theory of money?
c. Explain the quantity theory of money and what it implies about the impact of changes in the money supply on real output and prices.
a. The equation of exchange is MV = PY. M is the money stock (usually measured by M1 or M2), V is the velocity of money, P is the aggregate price level, and Y is real output. PY thus equals nominal GDP.
b. The quantity theory of money assumes that Y and V are constant (or at least determined by factors other than the amount of money in circulation).
c. The quantity theory of money states a proportional relationship between prices and the quantity of money in circulation. In this framework, changes in the money supply cause a proportional change in prices and do not affect real output.
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Could pollution be eliminated by banning all activities harmful to the environment?
A) No, because legislation is influenced by industrial lobbyists. B) No, because the cost of doing so would be higher than even the most dedicated environmentalist would agree to accept. C) Not until we have better information on the sources of pollution. D) Yes, if we are willing to place long-run considerations ahead of short-run profits.
The problem typically during a recession is not that there is too little money, but too little spending. If the problem was too little money, what would be its cause? If the problem was too little spending, what could be its cause?
What will be an ideal response?