had a little fun in class discussing the work of Copernicus, a mathematician and
ID: 2783237 • Letter: H
Question
had a little fun in class discussing the work of Copernicus, a mathematician and astronomer in the late middle ages who advanced the then-innovative idea that the earth rotated around the sun. We were surprised to note that Copernicus was also an economist, who created Gresham's Law, and who developed the Quantity Theory of Money, a theory still popular today among so-called "monetarist" economists, who stress the importance of the relationship between the Money Supply and aggregate price levels. a) Write the equation that expresses the Quantity Theory of Money. (You will need four variables b) Define in a word or two what each of the four variables represents. 10) in the 1920s, the Federal Reserve Bank (the Fed) began to use a very powerful tool to expand or contract the money supply. This tool is its Open Market Operations, operations in which the Fed buys and sells Treasury bonds(T-Bonds). Let's say that the Fed wants to use this tool to EXPAND the money supply. Would the Fed then sell T-bonds, or buy them?Explanation / Answer
a) MV=PT
b)M=money supply,v=velocity of circulation,p=average price levels,t=valume of transactions
c)to expand the money supply there needs to be more money in the market ( M from above equation).
in this case fed will buy t bonds,as t bonds are bought by fed they give money in return for the bond to the investor and hence increase the amount of money in the system
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