Question

1. Economic models Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship: P-AXM P-Price Level M Money Supply A A composite of other factors, including real GDP, that change very slowly over time. How might an economist gather empirical data to test the proposed relationship between money and the price level? Unlike researchers in the hard sciences, economists cannot study complex relationships using data. Economists do not usually develop theoretical models of the economy but only analyze 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 observe the resulting changes in the price level. An economist would look for data on past changes in the money supply, and note the resulting changes in the price level

Answer 1

An economist believes that there is positive relationship between price and money supply. In order to determine the relationship, empirical data can be collected from past changes in money supply and resulting change in price level. Thus, option D is correct.