Question
a) Write out the equation that describes the Quantity Theory of Money. Must indicate clearly what each variable in the equation means in order to
a) Write out the equation that describes the Quantity Theory of Money. Must indicate clearly what each variable in the equation means in order to earn full marks (4 marks).
Based on the equation, predict what would happen to inflation in the long run:
b). if the growth rate of the velocity of money is zero and money supply grows at a faster rate than real GDP growth rate. You may use some hypothetical numbers to illustrate your answer (1.5 marks)
c). if the growth rate of the velocity of money is zero and money supply grows at a slower rate than real GDP growth rate. Use some hypothetical numbers to show (1.5 marks)
d). Based on these two scenarios (b and c) and the quantity theory of money as stated in this question, what would be a good monetary policy for the economy in the long run? (3 marks)
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