1. The Fed attempts to stimulate the economy past the point of natural unemployment. Write down the quantity theory of money equation and point out the variable that represents the monetary policy.

2. Then, state what M. Friedman and monetarists said in the 1970s about the response from other variables in the equation.

3. Which of the below balances is the Federal Reserve's second-largest asset? What purpose does it serve?

a. Mortgage-backed securities

b. Treasury securities (T-bills, notes)

c. commercial bank deposits

d. paper bank notes (with presidents on them)

e. reverse repos