Question

When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory...

When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory of Money and

According to fisher effect and Liquidity preference theory framework, which is MS=L * ( i , Y), we know that nominal interest rate goes up, which leads to an increase in money demand.

My question is, by how much does the price level decreases and Money demand increases when MS falls?

Do we have one for one relationship among them or less than one for one?

I want to know the magnitude of each change as a result of change in money supply.

Please provide detail reasons with sufficient explanations.

Homework Answers

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
The quantity theory of money we discussed in class assumes that the ratio of money to...
The quantity theory of money we discussed in class assumes that the ratio of money to GDP is constant. This can be equivalently expressed by the Fisher equation: M ×V = P × Q Where: • M represents the money supply. • V represents the velocity of money. which is the frequency at which the average same unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the...
1. Recall the classical economists and one of their favorite theories: the quantity theory of money...
1. Recall the classical economists and one of their favorite theories: the quantity theory of money and monetary neutrality. The theory is expressed as an equation as follows: M x V = P x Y. What does V stand for? a. the value of the domestic currency b. the velocity of money c. the virtual reality of the universe d. the velocity of investment spending in the economy 2. Following up on question 1 above, what does Y represent? a....
Assume the money supply is $600, the velocity of money is 6, and the price level...
Assume the money supply is $600, the velocity of money is 6, and the price level is $3. Using the quantity theory of money: a. Determine the level of real output. b. Determine the level of nominal output. c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent? Nominal output would be $?? and real output would be $?? d. If the government established price controls and also raised the money supply 5 percent, what...
20. In the liquidity preference (money supply/money demand) model, we assume A. as nominal interest rates...
20. In the liquidity preference (money supply/money demand) model, we assume A. as nominal interest rates rise, households hold less wealth as money. B. as real income rises, households hold less wealth as money. C. as price level rises, households hold less wealth as money. D. as expected inflation increases, households hold less wealth as money. 21.When interest rates rise, the value of bank’s fixed-income assets and the revenue from future loans . A. rises/rises B. rises/falls C. falls/falls D....
Assume the money supply is $600, the velocity of money is 6, and the price level...
Assume the money supply is $600, the velocity of money is 6, and the price level is $3. Using the quantity theory of money: a. Determine the level of real output. b. Determine the level of nominal output. c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent? d. If the government established price controls and also raised the money supply 5 percent, what would happen? Instructions: You may select more than one answer. Click...
We discussed numerous times the importance of identifying shocks to money demand. In particular, we argued...
We discussed numerous times the importance of identifying shocks to money demand. In particular, we argued that the policy implications of shocks to money demand differ based on whether the shock to money demand was real or portfolio. a) (5 points) Let us consider a portfolio shock that increases money demand, say due to non-monetary assets becoming riskier and less liquid. Draw a real money demand and real money supply diagram locating the initial equilibrium point as point A and...
Scenario 14-1 The economy is in long-run equilibrium. Suddenly, due to improved international relations and the...
Scenario 14-1 The economy is in long-run equilibrium. Suddenly, due to improved international relations and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time. ____ 19.   Refer to the Scenario 14-1. In the short run, which of the following describes the changes that take place in the economy? a. Both the price level and real GDP rise. b. Both the price level and real GDP fall. c. The price...
According to classical macroeconomic theory, changes in the money supply affect nominal variables and real variables....
According to classical macroeconomic theory, changes in the money supply affect nominal variables and real variables. nominal variables, but not real variables. real variables, but not nominal variables. neither nominal nor real variables. The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, production is more profitable and employment rises. production is more profitable and employment falls. production is less profitable and employment rises. production is less profitable and employment falls....
Question: According to Monetarism, when does an increase in money supply change only price level and...
Question: According to Monetarism, when does an increase in money supply change only price level and not Real GDP? In the short run or in the long run? Explain your answer using a diagram.
The aggregate demand curve shows the relationship between the aggregate price level and: A) aggregate productivity....
The aggregate demand curve shows the relationship between the aggregate price level and: A) aggregate productivity. B) the aggregate unemployment rate. C) the aggregate quantity of output demanded by households, businesses, the government, and the rest of the world. D) the aggregate quantity of output demanded by businesses only. 2.When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This is known as the _____ effect and is a reason why...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT