Question

A member of​ Congress, who has never had an economics​ course, has just been placed on a Money and Banking Committee. The official needs a briefing prior to the first meeting concerning the role of the money supply in the economy. Which of the following statements should you insist that the official remember when entering the first committee​ meeting?

Answer 1

Answer:

He should be briefed in the following:

• Quantity theory of money: the equation M*V = P*y should probably be written to him in a piece of paper, so that he understands the relationship between the growth of money supply and inflation.
• He should also be explained about how the Fed controls the money supply, explaining to him the three most important monetary policy tools mechanisms: open-market operations, discount window, and reserve requirements.
• Finally, because of relevance, it should be explained to him, in a simple manner, what quantitative easing is, and why the Fed used this monetary policy tool to deal with the 2007-2008 Financial Crisis.