Question

QUESTION 6

1. 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
   		greater than 0.4 and less than or equal to 0.5
   		greater than 0.5

0.3 points   

QUESTION 7

1. If the inflation rate is 4% and the real money demand grows at 6%, what is the nominal money supply growth?

   		less than or equal to 5%
   		greater than 5% and less than or equal to 7%
   		greater than 7% and less than or equal to 9%
   		greater than 9% and less than or equal to 11%
   		greater than 11%

Answer 1

Q6)

income elasticity of real money demand = % change in real income / % change in real income

% change in real income = % change in nominal income - % change in price = 4-2 = 2%

% change in real income = 5%

=>  income elasticity of real money demand = 2/5 = 0.4

Thus, the answer is (c) greater than 0.3 and less than or equal to 0.4

Q7) Nominal money supply growth = Real money demand growth + inflation

= 6 + 4 = 10%

Thus, the answer is (d) greater than 9% and less than or equal to 11%