Chapter 16, Problem 2FCT

To determine

According to the quantity equation, if the U.S money growth rate were to double as a consequence of the Fed’s quantitative easing policies, what would be the effect on the inflation rate, other things being equal?

Introduction:

This popular equation was derived by Irving Fisher, he defined the quantity equation to be identify the relationship between the money stock and the aggregate expenditure. This equation says that the MV=PY: P- Price level, Y- Real GDP, M- Money supply, V- Velocity of money. The velocity of money is the number of times the money changes hands and reaches different hands. It defines the speed at which the money changes hands and how many of them.