Question

How might an economist gather empirical data to test the proposed relationship between money and the price level?

Answer 1

The quantity theory of money says that:
M V = P Y
where M is money supply, V is income velocity of money, P is price level and Y is income level.
Using the analyze of the empirical data, we can say that there is a long-run association between money and price.

Answer 2

An economist gather empirical data to test the proposed relationship between money and the price level by gathering data on past changes in the money supply and note the resulting changes in the price level.

Further explanation

Economists cannot study complex relationships using data because  they are unlike the researchers in the hard sciences that can run a controlled laboratory experiment for the generation of data to test the theories and relevant models. An economist would look for data on past changes in the money supply, and note the resulting changes in the price level

An economist can develop models and theories to provide a description of the world based on observed phenomena, because there is a close association between price and money.

Economists do not usually develop theoretical models of the economy but they only analyze the summary statistics about the current state of the economy.  An economist would persuade the Federal Reserve to change the money supply to various levels, and also observe the resulting changes in the price level.

An economist supposed to believe that the price level in the economy is directly related to the money supply or the amount of money circulating in the economy. The following relationship is applied to that condition:

$P=A * M$, where  

P = Price Level  

M = Money Supply  

A = A composite of other factors including real GDP that change very slowly over time.

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Answer details

Grade:  9

Subject:  business

Chapter:  relationship between money and the price level

Keywords: price level, money