Question

Question 3. The following Table gives information the rate of growth of the money supply and real income for the U.S and Europe over the next year.

You should assume that all other determinants of the demand for money are constant.

Real income growth Money supply growth

U.S 0.05 0.10

Europe 0.02 0.04

Given this information.

- What is inflation in Europe?

- What happens to the U.S exchange rate over the next year?

- Suppose that the Federal Reserve wants to reduce U.S inflation to zero. By how much should it increase the money supply?

- Suppose the Federal Reserve wants the exchange rate with Europe to be constant. By how much should the Fed increase the U.S money supply.

Answer #1

What is Inflation in European countries: The Inflation rate is the percentage of price increase or decrease during a particular month or a year The percentage usually indicates the speed at which the price increased or decreased. The Price of consumer goods is falling for the first time since 4 years in the 19 nation Euro area .

The European Union (EU) is a political and economic type partnership between 28 Member states. The European Union was founded after the second world war.

The income elasticity of money demand is 0.5 and the interest
rate elasticity of money demand is -0.2. Real income is expected to
grow by 4% over the next year and the real interest rate is
expected to remain constant over the next year. The rate of
inflation has been zero for several years. If the central bank
wants zero inflation over the next year, it should choose _______%
for the growth rate of the nominal money supply.

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...

Suppose the growth rate of the money supply is 3 percent, the
growth rate of velocity is 4 percent, and the growth rate of real
aggregate output is 2 percent. According to the equation of
exchange, the inflation rate would be _____ percent
Select one:
a. 7
b. 6
c. 5
d. 4
e. 3

Use the following information for the next 9 questions. You
should draw a graph that depicts the situation below and use your
picture to answer the questions. Assume that wages and prices are
sticky and that we start at a long-run equilibrium. Assume that at
this initial point, the growth rate of the money supply is 8%, the
growth rate of the velocity of money is 0% and that the real
economic growth rate is 5%. Now assume that the...

1.The Fed prefers to focus on the interest rate rather than
growth in the money supply because
a.it does not like to conduct open market operations.
b.the money supply is too unpredictable.
c.it makes inflation more predictable.
d.money demand is too volatile.
e.it is easier to fix the interest rate than maintain growth in
the money supply.
2. Assume the Fed has complete control over the money supply. If
the demand for money were greater than the supply of money,...

If the growth rate of the money supply is 8%, velocity is
constant, and real GDP grows at 4% per year on average, then the
inflation rate will be _____%.
If the growth rate of the money supply increases to 13%,
velocity is constant, and real GDP grows at 2% per year on average,
then the inflation rate will be _____%.
If the growth rate of the money supply increases to 13%,
velocity grows at 11%, and real GDP grows...

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. 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 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%.

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...

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