Question

In the following question, you are asked to determine whether the statements are true or false. Explain your reasoning to get full credit:

a) Natural level of unemployment cannot be changed through policy.

b) Assume velocity is constant. Suppose Fed keeps the money supply constant as well. Then, when the real GDP grows by 10 percent, prices should decrease by 10 percent.

c) Assume velocity is constant. Suppose Fed wants to follow a zero-inflation policy. Then, the rate of money growth should be kept equal to zero by the Fed.  

d) Credit Cards are considered money because they are a medium of exchange.

e) Gold is an example of fiat money.

Answer 1

a) False

Explanation:

Natural level of unemployment can change through policy for example, Job training-provide unemployed workers with skills that widen the range of jobs they can perform so reduce natural level of unemployment.

b) True

Explanation:

%Change in M + % change in V = % change in Y + % change in P

0 + 0 = 10% -10%

0 = 0

c) False

Explanation:

If velocity is constant and  Fed wants to follow a zero-inflation policy. Then, the rate of money growth should be kept equal the growth rate of output.

d) False

Explanation:

Credit cards are just means of payment not medium of exchange so it is not considered as money.

e) FAlse

Explanation:

Gold is a commodity money not fiat money.