Question

1. According to classical macroeconomic theory, money supply shocks are “neutral.”

a.Explain what this means.

b.Based on that theory, how would a 5% increase in a nation’s money supply affect its real wage rate (W/P), all else equal (up, down, or no change, and by how much)?

c. According to the quantity theory of money, how would a 5% increase in the money supply affect the price of goods and services (P), all else equal (up, down, or no change, and by how much)?

d. To be consistent with both theories, what would have to happen to the nominal wage rate (W)? Explain.

Answer #1

a. Money Supply Shocks are neutral means that any change in the quantity of money supplied by the economy will only lead to change in the nominal variables of the economy and not the real variables.Thus, money is neutral.

b. A 5 per cent increase in nation's money supply will keep the real wage rate of the economy constant. This is because money only impacts nominal variable and not real variables.

c. It will lead to equal increase in the prices of goods and services. Thus, with the increase in money supply by 5 per cent, the prices of goods and services will also increase by 5 per cent.

d. To be consistent with the above theories, the nominal wage must have risen by 5 per cent which will keep the real wages.

3. Use the classical model of a closed economy and the quantity
theory of money to predict how each of the following shocks would
affect real aggregate income (Y), the real interest rate (r), and
the price of goods and services (P) in a closed economy in the long
run, all else equal. For each shock, be sure to clearly state a
prediction for all three variables (up, down, or no change) and
illustrate your predictions with supply/demand diagrams for...

According to classical macroeconomic theory, changes in the
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nominal variables, but not real variables.
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neither nominal nor real variables.
The sticky-wage theory of the short-run aggregate supply curve
says that when the price level rises more than expected,
production is more profitable and employment rises.
production is more profitable and employment falls.
production is less profitable and employment rises.
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1. Recall the classical economists and one of their
favorite theories: the quantity theory of money and monetary
neutrality. The theory is expressed as an equation as follows: M x
V = P x Y. What does V stand for?
a. the value of the domestic currency
b. the velocity of money
c. the virtual reality of the universe
d. the velocity of investment spending in the economy
2. Following up on question 1 above, what does Y represent?
a....

8.
According to the Classical Dichotomy, a country with a
hyper-inflation due to excessive money supply growth should
have:
nominal wage falling
real wage falling
real wage rising
nominal wage rising
9.
According to the Quantity Theory of Money and the Fisher
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velocity) should raise the:
nominal interest rate and real interest rate
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rate
inflation rate and nominal interest...

1)
Compare and contrast the way Classical and Keynesian theory
determine the Demand for Money and how it is related to the Money
Supply. As a part of your comparison, indicate which of these
theories developed the concept of a Liquidity Trap and what this
does to the Demand for Money as part of that theory.

Use the AS/AD model to predict how each of the following shocks
would likely affect real aggregate income (Y), the overall level of
real interest rates (r), and the price of goods and services (P) in
the long run, all else equal. In each case, be sure to make a long
run prediction (up, down, or no change) for all three variables,
and illustrate your predictions with an IS/LM diagram and a
supply/demand diagram for the goods market.
a.Government purchases...

14. According to the Keynesian Cross model of income, how would
each of the following shocks affect a nation’s real aggregate
income (Y) in the short run, all else equal? For each shock, be
sure to clearly state a predicted direction of change for income,
illustrate your prediction with a Keynesian Cross Diagram, and
explain your predictions intuitively in words.a.Government
purchases decline b. Congress cuts household income taxes c.
Autonomous consumption increases d.Total factor productivity
increases

8. Use the classical model of a closed economy to predict how
each of the following shocks should affect a nation’s real
aggregate income (Y), national saving (S), investment (I), and
interest rate (r). Be sure in each case to clearly state your
predicted direction of change (up, down, or no change) for all four
variables and illustrate your predictions for S, I and r with a
supply/demand diagram for the loanable funds market.
The supply of capital (KS) increases
...

What are the major assumptions of Quantity Theory of Money
Write down the Equation of Exchange in terms of
quantities.
Write down the Equation of Exchange in terms of rate of
change.
If the money supply is increased by 10%, and output did not
change, what is the increase in inflation according to the Quantity
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When Money supply decreases permanently, we know that price
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rate goes up, which leads to an increase in money demand.
My question is, by how much does the price level decreases and
Money demand increases when MS falls?
Do we have one for one relationship among them or...

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