MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 15, Problem 1DQ
To determine
To explain: The reason for velocity being high when the interest rates are higher.
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Use the concept of opportunity cost to explain why velocity is higher at higher interest rates?
Why is it important to be aware of the different monetary theories?
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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- Critically analyze what facts determine the impact of an interest rate change? How effective is monetary policy?arrow_forwardIt is sometimes suggested that the Federal Reserve should try to achieve zero inflation. If we assume that velocity is constant, does this zero-inflation goal require that the rate of money growth equal zero? If yes, explain why. If no, explain what the rate of money growth should equalarrow_forwardConsider the behavior of long-term rates and short-term rates. Why do they behave differently?arrow_forward
- 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.arrow_forwardVelocity of Money in the United States. Using the Federal Reserve Bank of St. Louis Web site (www. research.stlouisfed.org/fred2), calculate the velocity of M1 and M2 in 1960 and 2000. How have they changed?arrow_forwardWhat is the effect on velocity if Congress outlaws the use of credit cards?arrow_forward
- a) Identify the four major tools of monetary policy. b) How can monetary policy address the problem of inflation?arrow_forwardWhat direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?arrow_forward
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