2. Suppose that the government of Australia wants to maintain a constant nominal money supply. Its current level of real output is Y= AS1800 billion (Australian dollar), and its real interest rate is r= 0.10. Assume that the income elasticity of money demand is 0.5 and the interest elasticity of money demand is -0.1. a. By what percentage does the equilibrium price level differ from its initial value if the output increases to r=A$1908 billion (and r remains at0.10)? {hint: use Eq.7.12} b. By what percentage does the equilibrium price level differ from its initial value if the real interest increases to r=0.11(andY remains at A$1800)? c. Suppose that the real interest rate increases to r-0.11. What would real output have to be for the equilibrium price level to remain at its initial value?

2. Suppose that the government of Australia wants to maintain a constant nominal money supply. Its current level of real output is Y= AS1800 billion (Australian dollar), and its real interest rate is r= 0.10. Assume that the income elasticity of money demand is 0.5 and the interest elasticity of money demand is -0.1. a. By what percentage does the equilibrium price level differ from its initial value if the output increases to r=A$1908 billion (and r remains at0.10)? {hint: use Eq.7.12} b. By what percentage does the equilibrium price level differ from its initial value if the real interest increases to r=0.11(andY remains at A$1800)? c. Suppose that the real interest rate increases to r-0.11. What would real output have to be for the equilibrium price level to remain at its initial value?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 8PA

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