Monetary Policy and the Fed

Read this chapter to understand in more detail the monetary policy tools, process, and impacts on the U.S. economy. Review specific monetary policies and their effects from our recent history.

Monetary Policy and the Equation of Exchange

Key Takeaways

The equation of exchange can be written MV = PY.
When M, V, P, and Y are changing, then %ΔM + %ΔV = %ΔP + %ΔY, where Δ means “change in.”
In the long run, V is constant, so %ΔV = 0. Furthermore, in the long run Y tends toward Y_P, so %ΔM = %ΔP.
In the short run, V is not constant, so changes in the money supply can affect the level of income.