An economist could use historical data analysis to gather empirical data for testing the proposed relationship between money and the price level. This involves collecting data on past changes in the money supply and observing the corresponding changes in the price level over time. By analyzing this time series data, economists can identify trends, correlations, and causations between these variables using statistical and econometric techniques such as regression analysis
. More specifically, the economist might:
- Use time series analysis to examine how variations in money supply affect inflation or price levels across different periods
- Apply regression models to quantify the strength and significance of the relationship between money supply (independent variable) and price level (dependent variable), controlling for other factors
- Exploit natural experiments or policy changes (e.g., central bank interventions) as quasi-experimental settings to observe causal effects on price levels
- Supplement quantitative analysis with surveys or observational studies to understand behavioral aspects influencing price setting in response to money supply changes
In summary, the primary method is to analyze empirical macroeconomic data- historical records of money supply and price indices-using econometric tools to test and validate the theoretical relationship between money and the price level
