Question

The quantity of exchange: MV = PY is true by definition. Now suppose that the money supply (M) is initially at $100 while velocity (V) is constant at 5 and initial nominal GDP (PY) at $500. Finally, suppose that nominal GDP (PY) consistent with natural rate of output is $600 and the Fed’s required reserve ratio is 20% a. Under the conditions described above, what open market operations should the Fed undertake? Why? Use money market to show the effect of this open market operation. b. Under these conditions, how many dollars would the Fed target for the money supply? Show your calculations. c.