Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Chapter 28, Problem 5SPPA
To determine
To explain:
Whether the velocity of circulation was constant, and the way it changed, if it was not constant. Also, the reasons for its changes.
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Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be...?
1.8 According to the quantity theory of money, if the money supply is growing at a rate of 5
percent, real GDP is growing at a rate of 2 percent, and velocity is constant, what will the
inflation rate be?
Use the Quantity Theory of Money equation to solve the following: If the velocity of circulation is constant, real GDP is
growing at 4.5 percent a year, the real interest rate is 2.1 percent a year, and the nominal interest rate is 5.7 percent a
year. Inflation is as computed in the previous question. The growth of money is %.
Chapter 28 Solutions
Foundations of Economics (8th Edition)
Ch. 28 - Prob. 1SPPACh. 28 - Prob. 2SPPACh. 28 - Prob. 3SPPACh. 28 - Prob. 4SPPACh. 28 - Prob. 5SPPACh. 28 - Prob. 6SPPACh. 28 - Prob. 7SPPACh. 28 - Prob. 8SPPACh. 28 - Prob. 9SPPACh. 28 - Prob. 10SPPA
Ch. 28 - Prob. 11SPPACh. 28 - Prob. 1IAPACh. 28 - Prob. 2IAPACh. 28 - Prob. 3IAPACh. 28 - Prob. 4IAPACh. 28 - Prob. 5IAPACh. 28 - Prob. 6IAPACh. 28 - Prob. 7IAPACh. 28 - Prob. 8IAPACh. 28 - Prob. 9IAPACh. 28 - Prob. 10IAPACh. 28 - Prob. 11IAPACh. 28 - Prob. 12IAPACh. 28 - Prob. 1MCQCh. 28 - Prob. 2MCQCh. 28 - Prob. 3MCQCh. 28 - Prob. 4MCQCh. 28 - Prob. 5MCQCh. 28 - Prob. 6MCQCh. 28 - Prob. 7MCQCh. 28 - Prob. 8MCQ
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- Q1. In 2019, an economy produces wheat only and has enough labor, capital, and land to produce 500 bushels of wheat (Y or real GDP). Price of wheat and money supply are $2 per bushel and $1,000 respectively. In 2020, the central bank increases money supply by $ 1040. Suppose both the velocity of money (V) and the amount of wheat produced remain unchanged. a. Compute the velocity of money and nominal GDP in 2019. b. Calculate inflation rate in year 2020. c. Use a well-labelled money supply-demand diagram to illustrate and explain what happen to the price level and the value of money after such money injection?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_forward21.According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by: A)the Organization of Petroleum Exporting Countries (OPEC). B)the U.S. Treasury. C)the Federal Reserve. D)private citizens. 22.According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be: A)increasing. B)decreasing. C)7 percent. D)constant. 23.If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent. A)3 B)4 C)9 D)11 24.Percentage change in P is approximately equal to the percentage change in: A)M. B)M minus percentage change in Y. C)M minus percentage change in Y plus percentage change in velocity. D)M minus…arrow_forward
- You are the head of the central bank and you want to maintain 0 percent long-run inflation. You use the quantity theory of money. Suppose long-run real GDP growth falls from 3 percent to 2 percent. Velocity is constant and initially inflation is 0. The quantity theory suggests you should: a) raise velocity b) choose a 0 percent money supply growth c) lower the growth of money supply to 2 percent d) raise the growth rate of money supply to 2 percent.arrow_forward34. In an economy, the money supply growth rate is 5.0%, the equilibrium real interest rate is 1.5%, the potential growth rate is 4.0%, the economic growth rate is 1.0%, the inflation rate is 3.0%, the unemployment rate is 4.5%, and the rate of increase in the circulation speed is -2%. In this case, in an economy that pursues an inflation target of 2.0%, what is the appropriate interest rate target based on Taylor's rule? (Omit the unit and answer with the first decimal place.)arrow_forwardSuppose that velocity of money is constant, the expected inflation rate is always equal to the actual inflation rate, and the expected real interest rate is 3%. Answer the following questions. Justify your answers. -When the growth rate of the money supply is 8% and the growth rate of real GDP is 2%, what is the nominal interest rate?arrow_forward
- 1. Inflation can cause increased wealth inequality through the Cantillion Effect. Essentially, this means that expansionary monetary policy benefits those who are initially given new money (usually those who are rich and well-connected), while the rest of the population suffers the effects of inflation. Using the quantity theory of money, explain why this is the case.case. 2. Assume that the economy has an annual inflation rate of 5 percent. Are the following investments profitable in real terms? You do not need to explain your answert. (a) The spot price of silver is $31 per ounce. You purchase 50 ounces of silver for $1,600, in order to compensate the merchant. Over the year, the spot price of silver rises to $34 per ounce, and you are able to sell the silver you have at the spot price. (b) You purchase a Non-Fungible Token (NFT) for $98 million. The following year, you are able to sell it for $102.5 million 3. Why does the 'inflation tax' transfer resources from working people to…arrow_forwardThe following data come from FRED, a database maintained by the St Louis Fed. According to FRED, Real GDP in 2009 was 97.5% of Real GDP in 2010. If so, then the inflation rate from 2009 should be. less than predicted by the Quantity Theory of Money because the Velocity of Money was slightly faster in 2010 than in 2009. Year M2 Nominal GOP 2009 $8.408 $14.45T % and that is slightly 2010 $8.618 $14.99T Type your numeric answer and submitarrow_forwardHow does the concept of velocity of money relate to the quantity theory of money, and what factors can influence the velocity of money in an economy? A) The velocity of money has no connection to the quantity theory of money. B) The velocity of money represents the rate at which money changes hands in the economy and is a key factor in the quantity theory of money; factors like consumer confidence and banking practices can influence it. C) The velocity of money measures the total money supply in an economy and is unrelated to the quantity theory of money. D) The velocity of money is determined solely by government policies.arrow_forward
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