Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 25, Problem 25.5.4PA
To determine
Inflation rate.
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Students have asked these similar questions
Suppose 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,…
If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 2 percent
per year, and velocity is constant, what will the inflation rate be?
4%. (Enter your response as an integer value.)
If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 2 percent
per year, and velocity is growing at 2 percent per year instead of remaining constant, what will the inflation rate be?
%. (Enter your response as an integer value.)
Assume that a country's money velocity remains constant and that the rate of money growth is 4%. A) What is the rate of spending growth? B) If money growth increases by 1.5 percentage points and consumption growth increases by 0.5 percentage points, what is the new rate of spending growth? C) Given your answer in Part B, what is the long-run rate of real GDP growth at an inflation rate of 4%?
Chapter 25 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 25 - Prob. 25.1.1RQCh. 25 - Prob. 25.1.2RQCh. 25 - Prob. 25.1.3RQCh. 25 - Prob. 25.1.4RQCh. 25 - Prob. 25.1.5PACh. 25 - Prob. 25.1.6PACh. 25 - Prob. 25.1.7PACh. 25 - Prob. 25.1.8PACh. 25 - Prob. 25.1.9PACh. 25 - Prob. 25.2.1RQ
Ch. 25 - Prob. 25.2.2RQCh. 25 - Prob. 25.2.3PACh. 25 - Prob. 25.2.4PACh. 25 - Prob. 25.2.5PACh. 25 - Prob. 25.2.6PACh. 25 - Prob. 25.2.7PACh. 25 - Prob. 25.2.8PACh. 25 - Prob. 25.2.9PACh. 25 - Prob. 25.2.10PACh. 25 - Prob. 25.3.1RQCh. 25 - Prob. 25.3.2RQCh. 25 - Prob. 25.3.3RQCh. 25 - Prob. 25.3.4RQCh. 25 - Prob. 25.3.5PACh. 25 - Prob. 25.3.6PACh. 25 - Prob. 25.3.7PACh. 25 - Prob. 25.3.8PACh. 25 - Prob. 25.3.11PACh. 25 - Prob. 25.3.12PACh. 25 - Prob. 25.4.1RQCh. 25 - Prob. 25.4.2RQCh. 25 - Prob. 25.4.3RQCh. 25 - Prob. 25.4.4RQCh. 25 - Prob. 25.4.5PACh. 25 - Prob. 25.4.6PACh. 25 - Prob. 25.4.7PACh. 25 - Prob. 25.4.8PACh. 25 - Prob. 25.4.9PACh. 25 - Prob. 25.4.10PACh. 25 - Prob. 25.4.11PACh. 25 - Prob. 25.5.1RQCh. 25 - Prob. 25.5.2RQCh. 25 - Prob. 25.5.3RQCh. 25 - Prob. 25.5.4PACh. 25 - Prob. 25.5.5PACh. 25 - Prob. 25.5.6PACh. 25 - Prob. 25.5.7PACh. 25 - Prob. 25.5.8PACh. 25 - Prob. 25.5.9PACh. 25 - Prob. 25.5.10PACh. 25 - Prob. 25.1RDECh. 25 - Prob. 25.2RDECh. 25 - Prob. 25.3RDECh. 25 - Prob. 25.4RDECh. 25 - Prob. 25.5RDECh. 25 - Prob. 25.6RDE
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Similar questions
- If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is constant, what will the inflation rate be? %. (Enter your response as an integer value.)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_forwardThe money supply in Freedonia this year is $150 billion. Nominal GDP is $750 billion and real GDP is $250 billion. Assuming that velocity of money is stable, real GDP grows by 2% this year, and the money supply does not change. What are the velocity, price level, and inflation rate this year?arrow_forward
- 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 equalarrow_forwardConsider the following scenario: a. In Argentina, the central bank needs to determine by how much to increase the money supply next year. Suppose they estimate an increase in the overall economic activity (real GDP) of 2.5% percent and have a target inflation rate of 4%. The velocity of money has been observed to be constant over the past many years. By what level should the central bank change the money supply to achieve its inflation target? b. Next year, the central bank of Argentina wishes to reduce inflation to 2 percent, and estimates an increase in real GDP by 1.5 percent. What should be the change in the money supply? c. What is an "inflation tax", and how might it explain the creation of inflation by a central bank?arrow_forwardAssume that money velocity is constant over time (v = v for all t). Suppose that the money supply grows at 5% (0.05) while real GDP grows at 3% (0.03). According to the quantitative theory of money, what should the inflation rate be? Round up to the second decimal point.arrow_forward
- What happens to nominal GDP if the money supplygrows by 17% but velocity declines by 24%?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_forwardIf the growth rate of the money supply is 0.06, the growth rate of output is 0.04, and the velocity of money is constant, what is inflation? 1.5% 2% 6% We need more information to be able to calculate inflation.arrow_forward
- In the quantity theory of money, velocity is assumed A) to increase with increases in the money supply. B) to equal 1.4. C) constant. D) to be a declining number. Velocity is A) not constant if the demand for money depends on the interest rate. B) infinite C) zero If the demand for money depends on the quantity theory of money A) interest rate; does not hold C) level of GDP; still holds If the equation for the for money depends on nominal income but not the interest rate. D) constant and the velocity is not constant, then the B) interest rate; still holds D) level of GDP; does not hold is looked on as a demand-for-money equation, then the demanc A) unanticipated inflation rate C) Keynesian income-expenditure model Monetarists and Keynesians impact of fiscal policy on the economy. A) agree; agree C) disagree; disagree B) real business cycle theory D) quantity theory of money For price stability, monetarists argue that the money supply should grow at a rate average growth of real output.…arrow_forwardIf the money supply increases by 7%, the price level by 2%, and the real output by 6%, then according to the equation of the quantitative theory of money, the velocity of money increases by:arrow_forwardQuestion 41 6. Table 6-1 contains historical data for nominal GDP, M1, and M2. 6.1 Use this data to compute V1, velocity based on M1; and V2, velocity based on M2. Be sure to round your answers for velocity to two decimal places. Note that Nominal GDP indicates PY in the quantity theory of money. Table 6-1. GDP, Money, and Velocity Year Nominal GDP ($B) M1 ($B) 1995 1996 1997 1998 1999 7,000 7,500 8,300 8,700 9,200 900 1,100 1,000 1,200 1,300 M2 ($B) 3,200 3,700 3,600 4,100 4,300 V1 V2arrow_forward
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