Problem
1. Show on a graph the effect of an increase in the supply of money (i.e. expansionary monetary policy) on equilibrium interest rates.
2. How would changes in interest rates in part (1) influence the exchange rate and GDP. Hint: the impact of money supply on GDP through interest rates and exchange rates is commonly referred to as the transmission of monetary policy.
3. Describe open market operations.
4. If real GDP is $6 trillion, the price level is 150, and the quantity of money is $300 trillion. Use the Quantity Theory of Money to determine the velocity of circulation. What information does the velocity of circulation provide?
5. According to the Quantity Theory of Money, if the quantity of money increases by 4 percent what happens to the price level in the long-run?