Question

1.)

Over the period 1987-2017, annual growth in real GDP averaged 2.6% per year, growth in M2 averaged 5.5% per year, and growth in velocity averaged -0.6% per year.   

Calculate the average inflation rate over the period 1987-2017.  Answer as a percent, round to one decimal place and do not enter a "%" sign.

2.)

Assume growth in velocity is equal to zero and potential (trend) real GDP grows at rate of 2% per year in the long-run.

If the central bank decided to keep the money supply constant, (growth rate = 0), then

		the economy would experience deflation of 2% per year.
		the economy would experience inflation of 2% per year.
		there would be no inflation or deflation.

3.)

Currently banks are holding a massive amountof excess reserves. You can see this here

If banks decided that now was the time to start making loans, which of the following are realistic ways the Federal Reserve could keep the money supply from expanding?

CHECK ALL THAT APPLY

		increase the interest rate paid on bank reserves
		increase the reserve requirement
		purchase securities from banks
		make discount loans
		sell securities to banks
		decrease the reserve requirement
		decrease the interest rate paid on bank reserves

Answer 1

1. As per quantity theory of money, increase in money supply + change in velocity of money circulation = Inflation + Increase in Real GDP

5.5 - 0.6 = Inflation + 2.6

Inflation = 2.3%

2. Using the same formula as above, 0 + 0 = 2 + inflation

Inflation = -2%

the economy would experience deflation of 2% per year. 3. Fed wants to decrease money supply and this can be done by following ways. These reduce the money available with commercial banks and they will automatically decrease lending to customers. increase the reserve requirement sell securities to banks decrease the interest rate paid on bank reserves