Question

1. The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year. What happens to prices? What happens to nominal interest rates? Why might the government be doing this?

2.List and describe six costs of inflation. /6

3.Explain how an increase in the price level affects the real value of money. /2

4.According to the quantity theory of money, what is the effect of an increase in the quantity of money? /1

5.Explain the difference between nominal and real variables and give two examples of each. /4

6. Using the quantity theory of money, suppose that this year’s money supply is $50 billion, nominal GDP is $1 trillion, and real GDP is $500 billion. /8

a. What is the price level? What is the velocity of money?

b. Suppose that velocity is constant, and the economy’s output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Bank of Canada keeps the money supply constant?

c. What money supply should the Bank of Canada set next year if it wants to keep the price level stable?

d. What money supply should the Bank of Canada set next year if it wants inflation of 10 percent?

Answer #1

The quantity theory of money we discussed in class assumes that
the ratio of money to GDP is constant. This can be equivalently
expressed by the Fisher equation:
M ×V = P × Q
Where:
• M represents the money supply.
• V represents the velocity of money. which is the
frequency at which the average same unit of currency is used to
purchase newly domestically-produced goods and services within a
given time period. In other words, it is the...

Suppose that this year’s money supply is $400 billion, nominal
GDP is $10trillion, and real GDP is $4 trillion.
1.What is the price level? What is the velocity of money?
2. Suppose that velocity is constant and the economy’s output of
goods and services rises by4% each year. What will happen to
nominal GDP and the price level next year if the Fed keeps the
money supply constant?
3.What money supply should he Fed set next year if it wants...

1. Using the quantity equation, what happens to the price level
if the money supply increases by 10%, velocity is constant, and
real GDP does not change?
2. Using the quantity equation, what happens to the price level
if the money supply increases by 10%, velocity is constant, and
real GDP increases by 5%?

1. Problems and Applications Q1
Suppose that this year's money supply is $400 billion, nominal
GDP is $12 trillion, and real GDP is $4 trillion.
The price level is
, and the velocity of money is
.
Suppose that velocity is constant and the economy's output of
goods and services rises by 3 percent each year. Use this
information to answer the questions that follow.
If the Fed keeps the money supply constant, the price level will
, and nominal...

The
government of a country increases the growth rate of the money
supply from 5 per cent per year to 50 per cent per year.
a.) what happens to prices?
b.) what happens to nominal interest rates?
c.) why might the government be doing this?

The velocity of money in the small Republic of Sloagia
is always the same. Last year, the money supply was $ 7 billion and
real GDP was $ 20 billion.
This year, the money supply increased by 5 percent, real
GDP by 4.2 percent, and nominal GDP is $ 19 billion.
Calculate the velocity of money
The price level last year,
The Price level this year
The inflation rate.

Suppose that this year's money supply is $500 billion, nominal
GDP is $10 trillion, and real GDP is $5 trillion.
The price level is _____, and the velocity of money is
_____.
Suppose that velocity is constant and the economy's output of
goods and services rises by 3 percent each year. Use this
information to answer the questions that follow.
If the Fed keeps the money supply constant, the price level will
(stay the same, rise by 3%, or fall...

Suppose that this year's money supply is $500 billion, nominal
GDP is $10 trillion, and real GDP is $5 trillion.
The price level is ______, and the velocity of money is
______.
.
Suppose that velocity is constant and the economy's output of
goods and services rises by 4 percent each year. Use this
information to answer the questions that follow.
If the Fed keeps the money supply constant, the price level will
_______ (rise by 4%, stay the same,...

2. Suppose that in the U.S., the income velocity of money (V) is
constant. Suppose, too, that every year, real GDP grows by 2.5
percent (%∆Y/year = 0.025) and the supply of money grows by 10
percent (%∆M/year = 0.10).
a. According to the Quantity Theory of Money, what would be the
growth rate of nominal GDP = P×Y? Hint: %∆(X×Y) = %∆X + %∆Y.
b. In that case, what would be the inflation rate (i.e.
%∆P/year)?
c. If the...

Suppose that initially the money supply is $1 trillion, the
price level equals 3, the real GDP is $5 trillion in base-year
dollars, and income velocity of money is 15. Then the money supply
increases by $100 billion, while real GDP and income velocity of
money remain unchanged. a. According to the quantity theory of
money and prices LOADING..., calculate the new price level after
the increase in money supply: nothing.

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