Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 22, Problem 3PA
To determine
Zero inflation and rate of money growth.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
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)
Knowledge Booster
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_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_forwardWhat is velocity of money? List two major determinants of velocity of money.arrow_forward
- According 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_forwardDefine velocity of money and discuss the major determinants of velocity.arrow_forward1) Assume that velocity (how many times a dollar is used in a given period) stays the same, and that GDP does not change. If the money supply doubles, what will happen to the general price level in the economy according to the quantity equation? A) The inflation rate will double. B) The price level will fall by a half. C) The price level will double. D)The price level will not change either. 2) During the financial crises and recession of 2007-09, the Fed lowered the federal funds rate target to 0-0.25%. However, long-term interest rates, like mortgage rates, were still fairly high. One thing the Fed did to lower long-term rates was that the Fed : A) bought long-term bonds B) lowered the long-term interest rates by lowering the reverse repo rate C) lowered the long-term interest rates by lowering the discount rate D) sold long-term bondsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
