Question

The income elasticity of money demand is 0.5 and the interest rate elasticity of money demand is -0.2. Real income is expected to grow by 4% over the next year and the real interest rate is expected to remain constant over the next year. The rate of inflation has been zero for several years. If the central bank wants zero inflation over the next year, it should choose _______% for the growth rate of the nominal money supply.

Answer #1

**Answer:
-**

We have the following information

· Income elasticity of money demand = 0.5

· Interest rate elasticity of money demand = -0.2

· Real income grows by 4% next year

· Zero growth rate for inflation and zero growth real rate for interest

We know that from the quantity theory of exchange

% change in M + % change in V = % change in Price + % change in real income

% change in M + 0 = 0 + 4%

Hence the central bank should choose a growth rate of 4% for nominal money supply

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QUESTION 6
If real income rises 5 percent, price rises by 2 percent,
nominal money demand rises by 4 percent, what is the income
elasticity of real money demand (assuming nominal interest rate
does not change)?
less than or equal to 0.2
greater than 0.2 and less than or equal to 0.3
greater than 0.3 and less than or equal to 0.4
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greater than 0.5
0.3 points
QUESTION 7...

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constant, at what rate will the demand for real balances grow?
b. What is the velocity of money in this economy?
c. If inflation and nominal interest rates are constant, at what
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d. How will a permanent (once-and-for-all) increase in the level
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year.
You should assume
that all other determinants of the demand for money are
constant.
Real income growth Money supply growth
U.S
0.05
0.10
Europe
0.02
0.04
Given this
information.
What is inflation in Europe?
What happens to the U.S exchange rate over the next year?
Suppose that the Federal Reserve wants...

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[ ? ? ] ? = ?(?, ?) = ? /5?
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b. If expected inflation and nominal interest rates are
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