QUESTION THREE Assuming a constant velocity of money while the money supply is growing 10% per year, real GDP is growing at 4% per year, and the real interest rate is r = 8%. Assume that actual Inflation is equal to expected inflation. a) Find the value of the nominal interest rate in this economy b) If the central bank increases the money growth rate by 4% per year, find the change in the nominal interest rate Ai C) Suppose the growth rate of Y falls to 2% per year. What will happen to inflation? What must the central bank do if it wishes to keep inflation constant?

When the growth rate of the money supply is decreased, interest rates wil rise immediately if the liquidity effect is ____ than the other money supply effects and there is ______ adjustment of expected inflation. larger; fast smaller; slow larger; slow smaller; fast

Now, consider an economy in which the demand for money is of the formY / (1 + it)  for t = 0, 1, 2, · · · , where output is 150 and it denotes the nominal interest rate inperiod t. The real interest rate, denoted r, is constant and equal to 4%. In period0 and 1, the money supply is 100 and people expect that money supply wouldbe 100 forever. People have rational expectations. In period 2, the central banksurprises people and sets the money supply will grow at 2 percent forever, that is,M0 = 100, M1 = 100, M2 = (1.02)M1, M3 = (1.02)M2, and so on.   A . Find the inflation rate, nominal interest rate, real money balance in period 1,and expected inflation in period 2, given the information available in period1, π1, i1, M1 / P1 and, E1π2. B . Find the inflation rate, nominal interest rate, real money balance in period 2,  and expected inflation in period 3, given the information available in period 2, π2, i2, M2  /  P2  and E2π3.   C . Compare E1π2 and π2.

Which of the following is NOT implied by the Quantity Theory of Money (QTM)? a With constant money supply and output an increase of velocity creates an increase in price level. b If velocity is stable an increase in the money supply is accompanied by a proportional increase in nominal GDP. c With constant money supply and velocity an increase in output creates a proportional increase in price level. d If velocity is stable an increase in the money supply is accompanied by a proportional increase of price level when real output stays the same.

1. Nominal GDP =P*Y, where P is the price level and Y is aggregate output (income) . We know from class slides that the velocity of money links money supply and nominal GDP. Given nominal GDP in a year is $10 trillion and the quantity of money (M1) is $2 trillion, what is the velocity? What is the meaning of this calculated velocity? 2. Suppose that real money demand is represented by the equation M“/P= 0.25×Y. Calculate the velocity of money. 3. Consider a five year $1000 semiannual coupon bond with a 5% coupon rate. If the bond is current trading for a price of $957.35, what is the bond's yield to maturity? If the bond's yield to maturity increase a little bit, what will the bond's price be? 4. Suppose a 7-year, $1,000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%. Is this bond currently trading at a discount, at par, or at a premium? Explain. If the yield to maturity of the bond rises to 7%, what price will the bond trade for? 5.…

u10. Using the demand and supply schedule for money shown below, do the following: a)Graph the demand for and the supply of money curves. b)Determine the equilibrium interest rate. c)Suppose the RBA decreases the money supply by $5 billion. Show the effect in your graph and describe the money market adjustment process that is likely to follow. What is the new equilibrium rate of interest? Interest rate (%) Demand for money (billions of dollars) Supply of money (billions of dollars) 4 10 30 3 20 30 2 30 30 1 40 30

C = 100 + 0.5 - (Y –T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Ť= 100. The LM (money market equilibrium) curve is M Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is xª = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to “ = 0.05. 3. Continue to suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run but instead of output, the CB wants to bring the nominal interest rate i back to its long-run equilibrium level. Explain whether it should decrease or increase money supply M, and what happens to short-run output Y and the real interest rate r if this policy is followed. 4. Suppose the CB…

the money supply of Freedonia this year is $150 billion nominal GDP is $750 billion .assuming that velocity of money is stable. real GDP gross 2%this year. and money supply does not change what are the velocity, price level, and inflation rate

1) Assume that the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its full-employment value of 10,000, and the price level is 2. a) Determine the real and the nominal demand for money. b) The government fixes the nominal money supply in this same economy at 5,000. With output fixed at its full-employment level and assuming that prices are flexible, what will be the new price level? What happens to the price level if the nominal money supply rises to 6000?

Using the quantity theory of money with a fixed money supply, increases in the transactions demand for money can only be satisfied by ____________. Group of answer choices A. increases in the velocity of money B. decreases in the velocity of money C. decreasing investment