Suppose a country has a money demand function (M/P)d = 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?

Explain the quantity theory of money and the effects of an expansion of the money supply. Does the empirical evidence support the idea that the income-velocity of money is constant?

The aggregate economy of India has a rate of money growth equal to 7. Initially the velocity of money is not changing. The long-run aggregate supply curve equals 2 But then there is a banking panic, causing the growth rate of the velocity of money to fall to -6 percent per year. In the absence of government intervention, the resulting recession would last for 3 years (meaning it would grow at the recession growth rate for 3 years, then return to long-run equilibrium after that). Assume that just before the recession started, India's level of GDP was equal to $100 billion. Your boss has proposed that the government should step in and use fiscal policy to end the recession immediately. But Raj Kumar, a member of the opposition, has claimed that fiscal policy is too expensive, and anyways there is no reason to end the recession because it will end on its own. To counter his argument, your boss has asked you to calculate how much lower GDP would be by the end of the recession if the…

Money neutrality is the idea that a. any policy can have intended and unintended consequences b. in the long-run, markets will clear and return the economy to equilibrium regardless of what happens to the money supply. c. there are two types of variables, nominal and real, and only nominal variables are affected by the money supply. d. nominal and real interest rates are unrelated.   During the middle of the 20th century, income inequality in developed economies generally fell. The reason for this was a. average incomes didn't rise but welfare systems redistributed income.  b. that returns to assets held by high income earners fell steadily. c. incomes overall rose but taxation systems were slowly made more and more progressive. d. a rise in average income with incomes of the bottom deciles rising faster than the top.