According to information gathered from the USA Census Bureau website, in 2021 the official poverty rate was estimated at 11.6% of families in the United States of America. That is, some 37.9 million people were estimated to be poor. Suppose someone came up with the idea of asking the government to produce more money: this new money would be distributed to families living in poverty.
The person who came up with the “brilliant idea” asks you a series of questions:
Which government institution can create the most money?
What tools does the Fed have to regulate money creation in the economy?
What is the long-run impact of a larger money supply on inflation?
What can be the impact of that money creation on the exchange rate?
Support your answer using the Quantitative Theory of Money formula M V=P Q; to analyze the effect of money creation on the exchange rate use the Purchasing Power Parity Model, Exchange Rate of Currency X to Y = Cost of good in currency X / Cost of good in currency Y.
Both models consider that the prices of goods and foreign currencies, are monetary phenomena, determined by the quantity of money in circulation.
Do you consider that the “brilliant” idea is good? Why yes or why no?
This week’s topic is intended to give you the opportunity to explore the impact of monetary policy on the economy; specifically on the general price level and the nominal exchange rate. You will need to demonstrate an understanding of the Fed’s tools to regulate monetary creation.
You can investigate in the US and overseas based on these sources:
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