Growth rate in the money supply

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The Quantity Equation MV = PY can be expressed as follows: (Growth Rate in the Money Supply) + (Percentage Change in Velocity) = (Inflation Rate) + (Growth Rate of Real GDP) Given this fact, suppose money velocity falls by 50% because individuals and companies begin stockpiling money in safes and under their beds rather than spending it. Explain in terms of the Quantity Equation why this drop in velocity threatens to cause a big drop in economic well-being. Can you design a money supply policy for the Fed that might allow it to prevent a 50% drop in Real GDP? If so, explain why you think it is appropriate? Does your answer change if you believe the Classical Dichotomy always holds?

Reference no: EM131090956

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