The Federal Reserve, the central bank of the United States, has an inflation target of 0.3% per month. According to the Quantity Theory of Money, by how much must the Federal Reserve grow the money stock in order to hit its inflation target? The Federal Reserve must decrease the money stock by 0.3% per year. The Federal Reserve must increase the money sock by 0.3% per year. The Federal Reserve must decrease the money stock by 0.3% per month. The Federal Reserve must increase the money stock by 0.3% per month.
The Federal Reserve, the central bank of the United States, has an inflation target of 0.3% per month. According to the Quantity Theory of Money, by how much must the Federal Reserve grow the money stock in order to hit its inflation target? The Federal Reserve must decrease the money stock by 0.3% per year. The Federal Reserve must increase the money sock by 0.3% per year. The Federal Reserve must decrease the money stock by 0.3% per month. The Federal Reserve must increase the money stock by 0.3% per month.
Chapter16: Monetary Policy
Section: Chapter Questions
Problem 15SQ
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Question
The Federal Reserve, the central bank of the United States, has an inflation target of 0.3% per month. According to the Quantity Theory of Money, by how much must the Federal Reserve grow the money stock in order to hit its inflation target?
The Federal Reserve must decrease the money stock by 0.3% per year.
The Federal Reserve must increase the money sock by 0.3% per year.
The Federal Reserve must decrease the money stock by 0.3% per month.
The Federal Reserve must increase the money stock by 0.3% per month.
Expert Solution
Step 1
The quantity theory of money suggests that the price level or inflation in the economy is directly related to the money growth which is the amount of money. If we want to increase inflation, the central bank must increase only growth and to decrease the inflation r price level, the central bank must decrease the money growth.
MV = PY
Money supply* Velocity = Price level* Output level or GDP
The V and Y remain constant and an increase in M leads to increase in the P. If the central bank has an inflation target of 0.3% per month, the money supply must increase by 0.3%per month.
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