Consider a full employment economy where the government wishes to increase the level of expenditures. The government chooses to finance these expenditures by increasing the money supply from $200 billion to $400 billion-. Further assume that the short run velocity of money is constant.
a. What equation could you use to analyze this situation? Describe the neo-classical (monetarist) quantity theory of money that applies in this situation.
b. What should happen to the level of prices in this particular economy?