Chapter 35, Problem 3CYU

To determine

The problems that would the country U have had since 1996 if the Fed had followed a monetarist policy.

Explanation of Solution

The term "velocity of money" refers to the rate at which consumers and companies exchange money in an economy. The given graph represents the velocity of money and if Fed had followed a monetarist policy from 1996, then the country U would have the following problems:

1. The path of the velocity of money would cause high demand in the United States because the decrease in the velocity of money shows that there is an increase in money demand. It happens because the urge to hold money decreases whenever the interest rate on financial assets is low as a result of attempts to exchange it for other goods or financial assets. The velocity of circulation increases as a result. Therefore, the velocity will be high when there is less demand for money in the country.
2. In addition, the path of the velocity of money would cause a high price level in the country because since there is more money pursuing the same amount of goods and services in the economy, an increase in the money supply would result in a corresponding increase in prices.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity which is produced and sold by firms at different prices in the market.

The price level is the average current price of goods and services in the economy that are produced in a particular interval.