Question

1. You have learned that money velocity is rather stable. Assume for simplicity that the velocity...

1. You have learned that money velocity is rather stable. Assume for simplicity that the velocity is constant (the quantity theory of money). Explain how the growth in the money supply and inflation are related.

2. Have you noticed how the gas prices are down right now? That follows the decrease in the oil prices, and everyone seems to believe this decline in oil price is temporary. You attend a meeting at the Bank of Canada, and hear that their analyst suggests, "Low oil prices increase the aggregate demand, and we face a real possibility of an increased inflation. To prevent undesirable inflation, we must reduce the money supply." Using the IS-LM-FE model, analyze the analyst’s proposal, i.e., explain whether and why his proposal would prevent undesirable inflation.

3. Current situation: Amid the coronavirus epidemics, the Bank of Canada has made three interest rate cuts, one on a FAD, March 4, and then two “emergency” cuts on March 16 and March 27. Use the IS-LM-FE model to explain what the Bank is trying to achieve and why.

Homework Answers

Answer #1

Sol 1 :

Money supply and inflation are related to each other in the following ways :

  • As, increase in money supply means people have more money in their hand.
  • If Increase in money supply , excess the growth rate of output in the economy will rise inflation level. Because with increase in money supply and having same level of output, people will compete for same quantity with increase money supply.
  • So , people is ready to give more money for the goods which will likely to rise the price level in the economy.
  • So , both inflation and money supply are postively related to each other.
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
There is a decrease in oil prices, and everyone believes this decline in oil prices is...
There is a decrease in oil prices, and everyone believes this decline in oil prices is temporary. You attend a meeting at the Bank of Canada and hear that their analyst suggests, "Low oil prices increase the aggregate demand, and we face a real possibility of increased inflation. To prevent undesirable inflation, we must reduce the money supply." Using the AD-AS model, analyze the analyst’s proposal, i.e., explain whether and why his proposal would prevent undesirable inflation (achieve price stability).
1. The government of a country increases the growth rate of the money supply from 5...
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. Suppose that we are at a long-run equilibrium and suddenly aggregate demand rises. In the...
1. Suppose that we are at a long-run equilibrium and suddenly aggregate demand rises. In the short run this will: a. increase prices. b. increase output. c. increase real wages. d. All of the above. e. Both A and B are correct. 2. The AS/AD model is unable to show a situation in which we have _____ and _____ at the same time. a. inflation;   growth b. deflation;   growth c. inflation;   depression d. deflation;   depression e. inflation; deflation. 3. A...
Coronavirus impact: India inflation likely to have hit six-month low in May: Poll . India consumer...
Coronavirus impact: India inflation likely to have hit six-month low in May: Poll . India consumer price inflation is likely to have moderated to a six-month low in May on a softer rise in food prices as supply disruptions eased after businesses reopened from the coronavirus lockdown in many parts of the country, a Reuters poll found. The June 4-9 poll of 35 economists showed that the consumer price index (CPI) was forecast to rise to 5.50% in May compared...
1. Assume that you received a 3 percent increase in your normal wage. Over the year,...
1. Assume that you received a 3 percent increase in your normal wage. Over the year, inflation ran about 2.1 percent. Which of the following is true? a) Your real wage increased. b) Although your nominal wage rose, your real wage decreased c) Both your nominal and real wages decreased d) your nominal wage decreased 2. There are many measures of changes in price levels. which one of the following is the broadest measure of inflation? a) the GDP Chain...
THIS IS THE GENERAL EQUILIBRIUM PROBLEM THAT I PROMISED. YOU FIRST SOLVE FOR THE INITIAL EQUILIBRIUM...
THIS IS THE GENERAL EQUILIBRIUM PROBLEM THAT I PROMISED. YOU FIRST SOLVE FOR THE INITIAL EQUILIBRIUM AS POINT A. WE CONSIDER TWO DIFFERENT AND SEPARATE SHOCKS (I CALL THEM SCENARIOS). THE FIRST SHOCK IS TO THE IS CURVE, THE SECOND SHOCK IS A ‘LM’ SHOCK. AGAIN, WE CONSIDER THESE SHOCKS SEPARATELY SO THAT AFTER YOU COMPLETE SCENARIO 1 (THE IS SHOCK), WE GO BACK TO THE ORIGINAL CONDITIONS AND CONSIDER THE SECOND SCENARIO WHICH IS THE ‘LM’ SHOCK. Consider the...
Argentina and Ecuador: Understanding the Currency Crisis While fiscal policy is never far from the mind...
Argentina and Ecuador: Understanding the Currency Crisis While fiscal policy is never far from the mind of your average Argentine, who remembers the tough times and hyperinflation of the 1980s, the events of 2001 and 2002 have brought fiscal policy back to the forefront of public concern. Though the early 1990s may have been characterized by financial optimism, Argentina has been in a recession since Brazil's 1998 monetary crisis sent shockwaves across the regional and global markets. In early 2002,...
What tools could AA leaders have used to increase their awareness of internal and external issues?...
What tools could AA leaders have used to increase their awareness of internal and external issues? ???ALASKA AIRLINES: NAVIGATING CHANGE In the autumn of 2007, Alaska Airlines executives adjourned at the end of a long and stressful day in the midst of a multi-day strategic planning session. Most headed outside to relax, unwind and enjoy a bonfire on the shore of Semiahmoo Spit, outside the meeting venue in Blaine, a seaport town in northwest Washington state. Meanwhile, several members of...
What role could the governance of ethics have played if it had been in existence in...
What role could the governance of ethics have played if it had been in existence in the organization? Assess the leadership of Enron from an ethical perspective. THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among the top Fortune 500 companies, collapsed in 2001 under a mountain of debt...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT