If Initially $\vec { M }$ = 5 $\vec { v }$

If initially, $\vec { M }$ = 5%, $\vec { v }$ = 3%, $\vec { P }$ = 2%,and $\vec { Y } _ { R }$ = 6% and then because of economic uncertainty $\vec { v }$ falls to 1%,what should the Fed do?

A) Quietly raise
$\vec{ Y } _ { R }$ to 8% to offset the decrease in
$\vec { v }$ .
B) Publicly lower
$\vec{ M }$ to 3% so that
$\vec{ M }$ -
$\vec { v }$ stays constant at 2%.
C) Publicly demonstrate a commitment to keep
$\vec{ M }$ +
$\vec { v }$ at 8% by raising
$\vec{ M }$ .
D) Quietly raise
$\vec{ M }$ without telling anyone,as only unexpected inflation is expansionary.

Correct Answer:

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