Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 22, Problem 3PA
To determine
Zero inflation and rate of money growth.
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Students have asked these similar questions
It 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 equal
It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. If we
assume that velocity is contant, 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 equal
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.
Chapter 22 Solutions
Essentials of Economics (MindTap Course List)
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Similar questions
- Use the concept of opportunity cost to explain why velocity is higher at higher interest rates?arrow_forward“If nominal GDP rises, velocity must rise.” Is this statement true, false, or uncertain? Explain your answer.arrow_forwardWhat is the effect on velocity if Congress outlaws the use of credit cards?arrow_forward
- This question uses approximate data from 2020. Over the year real GDP declined by about 3 percent, the inflation rate was about 1 percent, and the money supply increased by about 25 percent. What does this tell us about the velocity of money and the quantity equation (MV PY) over the year 2020. = Question 26 options: That velocity must have increased by a substantial amount. That velocity must have decreased by a substantial amount. That velocity was constant. That the quantity equation is not correct.arrow_forwardWhat did Friedman and Phelps argue about the effectiveness of monetary policies? As long as people’s inflation expectations were fixed, an increase in the money supply growth rate could not change output in the short or long run. If people’s inflation expectations were fixed, in the short run, a decrease in the money supply growth rate could raise output and unemployment. When the money supply growth rate changed, people would eventually revise their inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary. When the money supply growth rate changes, people slowly adjust their inflation expectations; therefore, the unemployment rate changes only in the long run but not in the short run.arrow_forwardFor the purpose of this exercise, assume that velocity is stable. If the Fed wants to keep inflation growing at about 2%, and the economy grew at about 6% during Q1 of 2021, then what would the growth in the money supply need to be in order for the Fed to hit its inflation target? And what does the substantially higher rate of money growth say about the likelihood of future inflation?arrow_forward
- How does money velocity contribute to the observation that in countries with high rates of inflation, the inflation rate exceeds the rate of money growth?arrow_forwardAccording to the data, output growth in the United States has averaged around 3%, inflation has averaged around 4% for the last 50 years, while money growth has averaged around 7%. What does this say about the growth rate of velocity? If money growth increased to round 10% for the next 50 years, what would you predict inflation to average over the next 50 years? Why?arrow_forwardwhy must the velocity of money be stable or predictable for the quantity theory of money to yield useful predictionsarrow_forward
- These are true or false. Need help with both please. The basic quantity equation of money is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output of the economy. (I got false on this one, but I have a feeling that the answer should be true). The data show that the velocity of M1 is unchanging, which is one reason for why there is very little uncertainty as to the effects of monetary policy. (I got true on this one, but I am not 100% sure).arrow_forwardSuppose you are put in charge of the central bank in an economy where potential GDP is growing at 3% and inflation has been 5% a year for the past few years. a) You find out that your predecessor had increased the money supply by 7% a year during this time. What does that say about the rate of velocity growth in this economy? b) You decide that 5% inflation is too high a rate, and that you need to take steps to reduce inflation to 2% a year. Assuming that the growth rate of velocity is a constant, what is the new rate of money growth you should implement in this economy? c) Continuing with your answer from b), what is the new rate of money growth you should implement in this economy to keep inflation at 2% a year if all else equal i) The growth rate of potential output rises to 4% ii) The growth rate of velocity falls to 0% d) How would your answer to b) would change if velocity growth was not constant, but instead was a random variable vt? You can answer this with algebra or words,…arrow_forwarda) Identify the four major tools of monetary policy. b) How can monetary policy address the problem of inflation?arrow_forward
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