Suppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year?

Suppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question 13 (1 point) Suppose the supply of money, measured by M1, is $3.0 trillion, output, measured by real GDP, is $18.7 trillion, and the velocity of money is 7.1. Suppose the supply of money increases to $3.7 trillion but GDP and the velocity of money do not change. What is the percent by which prices change? Provide your answer as a percentage rounded to two decimal places. Do not include any symbols, such as "$," "," "%," or "," in your answer. Your Answer: Answer
6) State how each of the following would affect the quantity of money demanded. Does the change cause a movement along the money demand curve or a shift of the money demand curve (state the direction of the shift or movement)? a) Interest rates rises from 5% to 8%. b) The consumer price index (CPI) rises in the economy.
The Quantity Theory of Money (QTM) states that ______. Note: the blank represents an entire phrase, not one word. (a) In the long run, an increase in the money supply will generate an equivalent increase in the velocity of money. (b) In the long run, an increase in the money supply will generate an equivalent increase in real GDP. (c) In the long run, an increase in the velocity of money will generate an equivalent increase in the price level. (d) In the long run, an increase in the money supply will generate an equivalent increase in the price level.
Assume that a country's money velocity remains constant and that the rate of money growth is 4%. A) What is the rate of spending growth? B) If money growth increases by 1.5 percentage points and consumption growth increases by 0.5 percentage points, what is the new rate of spending growth? C) Given your answer in Part B, what is the long-run rate of real GDP growth at an inflation rate of 4%?
1.25 MS, 1.00 Money Demand 0.75 MS2 0.50 0.25 3 4 QUANTITY OF MONEY (Billions of dollars) , therefore the equilibrium price level is According to your graph, the equilibrium value of money is Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to the public. Use the purple line (diamond symbol) to plot the new money supply ( MS2 ). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will and the value of money will VALUE OF MONEY
4. Here is the expression for money market equilibrium that we discussed in class: M = P· L(Y,r +n°) In growth rates, this expression is written: %AP %AM – %AL(Y,r + n°) a) Suppose the elasticity of money demand to a change in output is 1. If the central bank causes the money supply to grow at a 12% rate, and if output grows at a 7% rate, what will the inflation rate be? b) Repeat question a, in this case with the money supply growing at a 9% rate. c) In general, what is the relationship between money growth and inflation? d) What is monetary neutrality and how does it affect your answers to part c?
How does the concept of velocity of money relate to the quantity theory of money, and what factors can influence the velocity of money in an economy? A) The velocity of money has no connection to the quantity theory of money. B) The velocity of money represents the rate at which money changes hands in the economy and is a key factor in the quantity theory of money; factors like consumer confidence and banking practices can influence it. C) The velocity of money measures the total money supply in an economy and is unrelated to the quantity theory of money. D) The velocity of money is determined solely by government policies.
In the country Constantania, suppose the velocity of money is always the same. Last year, the money supply was $2 billion and real GDP was $5 billion. This year, the money supply increased by 6 percent, real GDP by 4 percent, and nominal GDP is $6.5 billion. a) Calculate the velocity of money and the price levels in the two years, and then calculate the inflation rate. b) Calculate the inflation rate using the formula AM/M + AV/V = AP/P + AY/Y, where the Greek letter A represents a change and the ratio AM/Mx 100 is the percentage change (or the rate of change) in M. Compare this result with the result you obtained in part a. Why could there be some difference? c) What is the difference between commodity money and fiat money? Why do people accept fiat currency in trade for goods and services?
Consider the following scenario: a. In Argentina, the central bank needs to determine by how much to increase the money supply next year. Suppose they estimate an increase in the overall economic activity (real GDP) of 2.5% percent and have a target inflation rate of 4%. The velocity of money has been observed to be constant over the past many years. By what level should the central bank change the money supply to achieve its inflation target? b. Next year, the central bank of Argentina wishes to reduce inflation to 2 percent, and estimates an increase in real GDP by 1.5 percent. What should be the change in the money supply? c. What is an "inflation tax", and how might it explain the creation of inflation by a central bank?
Suppose the money demand function is ▪ Md/P = 1000+ 0.2Y - 1000 (r + πе). (a) Calculate velocity if Y = 2000, r = .06, and Te = .04. (b) If the money supply (Ms) is 2600, what is the price level? "(c) Now suppose the real interest rate rises to 0.11, but and Ms are unchanged. What happens to velocity, and the price level? So if the hominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?
The money market is in equilibrium when the supply of money (Ms) equals the demand for money (Md). Given Ms = 350 and Md = 650 – 150r, where r is the real rate of interest, in percent. Calculate the equilibrium interest rate. How does the equilibrium interest rate alter if Bangladesh Bank (Central Bank of Bangladesh) takes contractionary monetary policy (by changing the money supply)? What is the effect of this policy on the Bangladesh economy? Explain graphically and mathematically.
28) When the Fed raises the federal funds rate A) the value of the dollar rises on the foreign exchange market. B) consumption increases. C) net exports increase. D) the value of the dollar falls on the foreign exchange market. 29) An inflation rate targeting rule A) reduces uncertainty about monetary policy. B) means that the inflation rate must exceed 5 percent in order for the rule to be effective. C) has been adopted the by the Fed in response to the financial crisis of 2008-2009. D) will not work if the Fed continues to sue open market operations.