Answered: The supply of credit cards is given by…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The supply of credit cards is given by q = 1
400X, where X are real credit card balances, q is
the real price of the credit card balance. You also know that R = 0.05 (nominal interest rate)
and P = 100. Answer the following questions about this:
(a) If the money supply is M s= $5, 000, if P = 100 is the equilibrium price level, find Y (real
output).
(b) Suppose that the Federal Reserve Bank decides to increase the money supply by 10%.
How much is the inflation rate as a result? Explain and justify your answer.

(c) Further suppose that at the same time, real output, Y , increases by 10%. Now what is
the inflation rate? Does our quantity theory of money hold here?

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