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    Money Supply: Six Questions

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    True or False (provide an explanation for why).

    1) Since the Fed implemented "quantitative easing", the money supply has increased dramatically.

    2) If the velocity of money is stable, the Quantitative Theory of Money predicts that inflation rises one-for-one with money growth.

    3) A country runs a budget deficit financed by printing money. In this situation, you'd expect to see inflation and a currency appreciation.

    4) If the government implements a stimulus package by cutting personal taxes, it is sure to stimulate consumption but also discourage investment.

    5) High world interest rates are the natural consequence of global imbalances arising from a "global savings glut".

    6) Productivity growth in emerging markets usually is driven by promoting natural resource and mineral development.

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    Solution Preview

    Step 1
    True. By definition quantitative easing means introducing new money into the economy. The Fed buys government securities or other securities to lower interest rates and increase money supply.

    Step 2
    True, The quantity theory of money predicts one-for-one relationship between changes in money growth rate and changes in inflation rate. The money supply is the quantity of money available in the ...

    Solution Summary

    This solution explains six questions relating to money supply. The sources used are also included in the solution.