Question

1-) 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.

Answer 1

1> False

Natural rate of unemployment is the sum of frictional and structural unemployment, which can not changed by fiscal or monetary policy, only cyclical rate can be changed.

2> True

Since we know MV=PY by quantity theory of money and we also know, M and V are constant, so a growth in Y must be balanced by a fall in P by equal amount.

3> False

By MV=PY, with no inflation P is constant, V is also constant. So, M should grow at the rate of Y, not zero.

4> False

Credit card is not exchanged for goods and service, so it is not a medium of exchange.