Provide the equation for the velocity of money in terms of Price level (P), output (Y), and the amount of money in the economy (M) a) Explain what will happen to velocity if P increases and why. b) Explain what will happen to velocity if Y increases and why. c) Explain what will happen to velocity if M increases and why.
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- Provide the equation for the velocity of money in terms of Price level (P), output (Y), and the amount of money in the economy (M)
- a) Explain what will happen to velocity if P increases and why.
- b) Explain what will happen to velocity if Y increases and why.
- c) Explain what will happen to velocity if M increases and why.
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Solved in 3 steps
- 1) Assume that velocity (how many times a dollar is used in a given period) stays the same, and that GDP does not change. If the money supply doubles, what will happen to the general price level in the economy according to the quantity equation? A) The inflation rate will double. B) The price level will fall by a half. C) The price level will double. D)The price level will not change either. 2) During the financial crises and recession of 2007-09, the Fed lowered the federal funds rate target to 0-0.25%. However, long-term interest rates, like mortgage rates, were still fairly high. One thing the Fed did to lower long-term rates was that the Fed : A) bought long-term bonds B) lowered the long-term interest rates by lowering the reverse repo rate C) lowered the long-term interest rates by lowering the discount rate D) sold long-term bondsIn the quantity theory of money, velocity is assumed A) to increase with increases in the money supply. B) to equal 1.4. C) constant. D) to be a declining number. Velocity is A) not constant if the demand for money depends on the interest rate. B) infinite C) zero If the demand for money depends on the quantity theory of money A) interest rate; does not hold C) level of GDP; still holds If the equation for the for money depends on nominal income but not the interest rate. D) constant and the velocity is not constant, then the B) interest rate; still holds D) level of GDP; does not hold is looked on as a demand-for-money equation, then the demanc A) unanticipated inflation rate C) Keynesian income-expenditure model Monetarists and Keynesians impact of fiscal policy on the economy. A) agree; agree C) disagree; disagree B) real business cycle theory D) quantity theory of money For price stability, monetarists argue that the money supply should grow at a rate average growth of real output.…Assume a 10 percent increase in the money supply causes a 5 percent increase in the price level. This can be explained by either a rise in output or a rise in velocity. rise in output or a fall in velocity. fall in output or a rise in velocity. fall in output or a fall in velocity.
- Suppose a country has a money demand function (M/P)ª = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What is its relationship to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.The velocity of money represents: (a) Whether individuals are increasing or decreasing the quantity of money spent in an economy (b) The quantity of money available in an economy (c) The level of prices determined by the equation of exchange (d) How often money is used in a specific period of time (e) Whether currency is accepted as a medium of exchange in an economya) In ordinary language, explain the meaning of Velocity of Money.b) State and explain the variables in the equation of exchange.c) Use the equation of exchange stated in (b) above to explain the relationship between changes in the money supply and the price level. State any assumptions made.
- Suppose the money demand function is ▪ Md/P = 1000+ 0.2Y - 1000 (r + πе). (a) Calculate velocity if Y = 2000, r = .06, and Te = .04. (b) If the money supply (Ms) is 2600, what is the price level? "(c) Now suppose the real interest rate rises to 0.11, but and Ms are unchanged. What happens to velocity, and the price level? So if the hominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?28) When the Fed raises the federal funds rate A) the value of the dollar rises on the foreign exchange market. B) consumption increases. C) net exports increase. D) the value of the dollar falls on the foreign exchange market. 29) An inflation rate targeting rule A) reduces uncertainty about monetary policy. B) means that the inflation rate must exceed 5 percent in order for the rule to be effective. C) has been adopted the by the Fed in response to the financial crisis of 2008-2009. D) will not work if the Fed continues to sue open market operations.Which of the following statements about the income velocity of money (V) is NOT correct? a. It is an indicator of the demand for money as an asset (store of wealth). b. It is equal to the ratio of GDP to some measure of the stock of money such as M2. c. It is influenced by the public expectations regarding future rates of inflation. d. none of the above.
- (c) Monetory policy authorities will respond to the change in price level that occurred in part (b). How might the central bank respond to the change you described in part (b)? (d) Draw a correctly labeled graph of the money market. a. Label the equilibrium interest rate. b. Show on your graph the change in money supply that will occur due to the monetary policy described in part (c). c. Show on your graph the change in interest rates that will occur due to the monetary policy described in part (c). (e) At the same time, assume that policymakers at the Bank of England enforce an expansionary monetary policy.If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?This question uses approximate data from 2020. Over the year real GDP declined by about 3 percent, the inflation rate was about 1 percent, and the money supply increased by about 25 percent. What does this tell us about the velocity of money and the quantity equation (MV PY) over the year 2020. = Question 26 options: That velocity must have increased by a substantial amount. That velocity must have decreased by a substantial amount. That velocity was constant. That the quantity equation is not correct.