COLLABORATIVE
EXERCISE
The Quantity Theory of Money
1. Suppose that financial and technological
innovations suddenly cause consumers to spend ("turn over")
their money much more rapidly. Write out the quantity equation below and
explain which one of the variables would reflect this change in consumer
behavior. Assume that the Federal Reserve holds the money supply constant.
2. What part of the quantity equation
represents nominal GDP? What will now be the effect of the change in
consumer behavior on the nominal GDP?
3. In the long run, what will be the effect of
this change in consumer behavior on real output and the price level?
4. Would your answer to question 3 be the same
if you came to believe that monetary neutrality does not apply in the long
run?
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