Question

Suppose that the growth rate of the money supply (*M*) is
back at 7%, and the growth rate of real GDP (*Y*) falls to
1%

§What is the new inflation rate (*?*π) in the
economy?

§What is the new value of the nominal interest rate
(*i*)?

§What must the Fed do if it wishes to keep *?* π and
*i* at the initial levels of 3% and 6%.

Answer #1

True or False?
Suppose that the real interest rate is 3 percent. The money
supply is currently growing by 7 percent per year and real GDP is
growing by 2 percent per year. If the Fed permanently reduces the
growth rate of the money supply to 6 percent, the nominal interest
rate will fall to 1 percent. (Hint: Since the change in the money
growth rate is permanent, it will permanently change the inflation;
people will then adjust their expectations...

1 (a) An economy’s money supply growth is 6 per cent, real
output growth is 4 per cent, and nominal interest rate is 3 per
cent.
Find the inflation rate.
Find the real interest rate.
(b) How would falls of GDP growth due to Covid-19 pandemic
affect inflation rate in the
economy?
(c) What policy would you recommend for the problem in (b)?

2. (a) An economy’s money supply growth is 6 per cent, real
output growth is 4 per cent, and nominal interest rate is 3 per
cent.
Find the inflation
rate.
(1)
Find the real interest
rate.
(1)
(b) How would falls
of GDP growth due to Covid-19 pandemic affect inflation rate in
the
economy?
(2)
(c) What policy would
you recommend for the problem in (b)?
(1)

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...

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...

Assume that the demand for real money balance, (M/P) d = 0.5Y –
200i, where Y is national income and i is the nominal interest rate
(in percent). The real interest rate r is fixed at 2 percent by the
investment and saving functions. The expected inflation rate is 1
percent, real GDP is 5,000 and the money supply is 209,110.
a. What is the nominal interest rate?
b. What is the price level?
c. Now suppose Y is 2,000,...

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...

1 Assume that the demand for real money balance (M/P) is M/P =
0.6Y – 100i, where Y is national income and i is the nominal
interest rate (in percent). The real interest rate r is fixed at 3
percent by the investment and saving functions. The expected
inflation rate equals the rate of nominal money growth.
a. If Y is 1,000, M is 100, and the growth rate of nominal money
is 1 percent, what must i and P...

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