4. Here is the expression for money market equilibrium that we discussed in class: M = P. L(Y,r + n") In growth rates, this expression is written: %AP = %AM – %AL(Y,r +n°) a) Suppose the elasticity of money demand to a change in output is 1. If the central bank causes the money supply to grow at a 12% rate, and if output grows at a 7% rate, what will the inflation rate be? b) Repeat question a, in this case with the money supply growing at a 9% rate. c) In general, what is the relationship between money growth and inflation?

4. Here is the expression for money market equilibrium that we discussed in class: M = P. L(Y,r + n") In growth rates, this expression is written: %AP = %AM – %AL(Y,r +n°) a) Suppose the elasticity of money demand to a change in output is 1. If the central bank causes the money supply to grow at a 12% rate, and if output grows at a 7% rate, what will the inflation rate be? b) Repeat question a, in this case with the money supply growing at a 9% rate. c) In general, what is the relationship between money growth and inflation?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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M7
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QUESTION 4Consider the model of money demand we saw in class. Let the elasticity of money demand with respect to real income be 0.8 and the elasticity of money demand with respect to the interest rate on non-monetary assets be -0.2. Imagine that real income goes up by 3%, the interest rate on non-monetary assets goes up by 1%, and the price level does not change. Then the nominal demand for money changes by________percent.Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol "6". fyour answer is a negative number, type a dash in front of your answer, i.e, "-999.99.
Q#2: (i) Find the level of income Y and the rate of interest i that simultaneously bring equilibrium to the economy and estimate the level of consumption C, investment I, the speculative demand for money Mw and the transaction-precautionary demand for money Mt,when (5) (a) the money supply M,= 1000, С 950 + 0.75Y, I 310 - 125i, S = 264 – 175i, and M, M, 0.15Y, and W (b) М, 800,C = 1200+ 0.6Y,I = 227 – 180i, MW = 127 – 180i, and M² || %D S 0.2Y. ||