Exploring Macroeconomics
8th Edition
ISBN: 9781544337722
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
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Question
Chapter 19, Problem 5P
To determine
(a)
To show:
The effect of an unanticipated decrease in the supply of money on the inflation rate.
To determine
(b)
To show:
The effect of unanticipated decrease in the supply of money on the
To determine
(c)
To show:
The effect of unanticipated decrease in the supply of money on the real output.
To determine
(d)
To show:
The effect of unanticipated decrease in the supply of money on the real wage.
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Students have asked these similar questions
Which of the following would cause the price level to rise and output to fall in the short run?
a. an increase in the money supply
b. a decrease in the money supply
c. an adverse supply shock
d. a favorable supply shock
The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year.
a) What happens to prices?
b) What happens to nominal interest rate?
c) Why might the government be doing this?
In response to a decrease in interest rates, would the following things be smaller, larger, or no different in the long run than in the short run?a consumer expendituresb the inflation ratec the interest rated aggregate output
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- The economy begins in long-run equilibrium. Then one day, the president appoints a new Fed chair. This new chair is well known for her view that inflation is not a major problem for an economy. a. How would this news affect the price level that people expect to prevail? b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts? c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level?arrow_forwardThe economy of Macro Island is described by the quantity equation with constant velocity. All residents of Macro Island understand the quantity theory and use it to form their expectations of inflation. Real income grows at a steady 2 percent per year, and the nominal interest rate is 5 percent. In one year, people had expected the money supply to grow by 4 percent, but in fact it grew by only 3 percent. a. What was the inflation rate? (3% 4% 1% 2%) b. What was the expected inflation rate? (1% 4% 3% 2%) c. What was the ex ante real interest rate? (4% 2% 1% 3%) d. What was the ex post real interest rate? (2% 1% 4% 3%) e. Did the deviation of inflation from what was expected hurt creditors or debtors? ( Creditors Debtors)arrow_forwardSuppose that a change in government regulations allows banks to start paying interest on checking accounts. a. How does this change affect the demand for money? b. What happens to the velocity of money? c. If the Fed keeps the money supply constant, what will happen to output and prices in the short run and in the long run?arrow_forward
- Q. Explain why economists consider inflation at too high a level to be a bad thing.arrow_forwardEmpirical evidence that substantiates the Quantity theory includes which of the following? Select one or more: a. Countries with high rates of inflation over many years have high rates of growth of the money supply. b. In the US each year, the increase in the money supply is within a small margin of the increase in prices that year. c. Countries with high rates of inflation over many years have high rates of growth of real GDP. d. Countries with independent central banks tend to have high rates of inflation.arrow_forwardWhat is the likely effect on inflation when a central bank increases the money supply rapidly? A. Inflation will decrease. B. Inflation will remain stable. C. Inflation will increase. D. Inflation will first decrease, then increase.arrow_forward
- In theory, inflation not only ______ the value of consumers' money over time, but it also increases the ____ of producers over time. a.Decreases, wages b.Increases, interest rates c.Decreases, unemployment d.Increases, real GDParrow_forwardWhat must the gum economy’s Fed do to meet its long-run instruction in relation to production expansion if it has the same mandate as the U.S. Fed? The gum economy Fed must question A. stop the quantity of money from changing. B. double the quantity of money. C. match the growth of the quantity of money to the growth in real GDP. D. keep the growth of the quantity of money in line with the inflation rate.arrow_forwardWhat can be used to reduce aggregate demand and thereby control demand pull inflation? One wordarrow_forward
- The quantity theory of money has which of the following implications?When the money supply grows faster than potential output, there is deflationIs based on the idea that monetary policy can affect the unemployment rate in the long runA central bank can increase the velocity of moneyNone of the abovarrow_forwardIf the velocity of money is assumed to be constant in the short run, the quantity theory of money contends that a decrease in the money supply will lead to a proportional a.Increase in unemployment rate b.Increase in nominal interest rate c.increase in price level d.Decrease in nominal outputarrow_forwardIn order to combat inflation, the Fed will ________ the federal funds rate thereby ________ the quantity of money. a. raise; increase b. lower; increase c. raise; decrease d. lower; decreasearrow_forward
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