monetary policy and quantity theory of money

Monetary policy

Measure taken by central bank to achieve economic goal by adjusting money supply or interest rate

open market operation

Discount rate

Adjust required reserve ratio

Print money

Expansionary monetary policy

During deflation ,money supply increase,interest rate decrease ,C and I increase ,AD increase

Contractionary monetary policy

During inflation ,money supply decrease, interest rate increase, C and I decrease ,AD decrease

Quantity theory of money

MV=PY

M(money supply or quantity of money)

V(velocity of circulation of money)

P(price level)

Y(real gdp)(value of all good and services adjusted for inflation)

What is constant in short run and long run

V is constant

Y and V is constant in long run(since LRAS is vertical )

In short run and long run

I

Implication

money supply increase lead to increase in price level or real output level in sr

Money supply increase lead to increase in price level and unchanged in real output