Question

If the federal reserve banks mailed everyone in the United States a new $1000.00 bill, what would happen to prices, output, and income? Illustrate your answer by using the equation of exchange.

Answer 1

If the Fed mailed everyone a $1,000, the effect would be a rise in prices, output, and income.

What happens when money is injected into the economy?

The Equation of exchange is:

Money supply x Velocity of money = Price level x Quantity of goods and services produced

If the Money supply increases like it will when $1,000 is sent by the Fed to people, the velocity will also rise as people purchase more goods and services.

The Price level and the Quantity produced on the right side of the equation would also have to rise to match the left side. So prices would rise, and so would output.

Find out more on the equation of exchange at brainly.com/question/10110078.

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