Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 7, Problem 2NP
a)
To determine
To evaluate the real money
b)
To determine
To evaluate the real money demand, nominal money demand, and velocity If P = 200, Y = 1000, and i = 0.10
c)
To determine
To evaluate whether velocity is affected by an increase in real income, by an increase in the nominal interest rate, and by an increase in the price level.
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Assume that the quantity theory of money holds and that velocity is constant at 4. Output is fixed at its full-employment value of 42,000, and the price level is 1.00.
a. Determine the following:
Real demand for money: 10500 (enter your response as an integer)
Nominal demand for money: 10500 (enter your response as an integer)
b. In this same economy the government fixes the nominal money supply at 7,500. With output fixed at its full-employment level and with the assumption that prices
are flexible, what will be the new price level?
P=(enter your response as a decimal rounded to two decimal places).
Assume that the quantity theory of money holds and that velocity is constant at 4. Output is fixed at its full-employment value of 18,000, and the price level is 1.25.
a. Determine the following:
Real demand for money:
(enter your response as an integer)
Nominal demand for money:
(enter your response as an integer)
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.
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Similar questions
- Inflation – Work It Out: Question 2 Consider an economy with the money demand function is = Round answers to two places after the decimal when necessary. d. Suppose the announcement of a new head of the central bank, with a reputation as a tough inflation fighter, reduces expected inflation by 1.5 percentage points. According to the Fisher effect, what is the new nominal interest rate? New nominal interest rate: e. Calculate the new velocity of money. New velocity of money: E|arrow_forwardE4 Assume the real money demand of an economy is:(Md/P) = 2×Yb(r + πe)-awhere 0 < b < 1 and 0 < a < 1.a) Use the real money demand above to determine the velocity of money.b) Does the quantity theory of money hold in this economy? Explain.c) Show with calculus how the velocity of money reacts to a change in output and a changein the nominal interest rate.d) Find the income and the nominal interest rate elasticities of money demand.arrow_forward1) Assume that the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its full-employment value of 10,000, and the price level is 2. a) Determine the real and the nominal demand for money. b) The government fixes the nominal money supply in this same economy at 5,000. With output fixed at its full-employment level and assuming that prices are flexible, what will be the new price level? What happens to the price level if the nominal money supply rises to 6000?arrow_forward
- Question 6. Suppose that money supply and money demand determine the price level (P) in an economy. As shown in the equation below, in equilibrium, money demand equals to money supply. Equilibrium M L(r +Er,Y) P The supply of real money balances Real money demand where M is the quantity of money, P is the price level, r is the real interest rate, En is the expected inflation, and Y is the national income. a. Does the real money demand positively or negatively depend on nominal interest rate, į =r+Ex? Does the real money demand positively or negatively depend on national income, Y? Why? Briefly explain your answer. b. For given values of r, Y and M, explain how nominal interest rate (i), real money demand, and price level (P) respond to an increase in Er. Briefly explain your answer.arrow_forwardIn the country Constantania, suppose the velocity of money is always the same. Last year, the money supply was $2 billion and real GDP was $5 billion. This year, the money supply increased by 6 percent, real GDP by 4 percent, and nominal GDP is $6.5 billion. a) Calculate the velocity of money and the price levels in the two years, and then calculate the inflation rate. b) Calculate the inflation rate using the formula AM/M + AV/V = AP/P + AY/Y, where the Greek letter A represents a change and the ratio AM/Mx 100 is the percentage change (or the rate of change) in M. Compare this result with the result you obtained in part a. Why could there be some difference? c) What is the difference between commodity money and fiat money? Why do people accept fiat currency in trade for goods and services?arrow_forwarda) According to the quantity theory of money, changes in money supply have different effects on real and nominal variables in the Long – Run. Explain the reasoning behind this finding and what does this imply for inflation, the price level and output.arrow_forward
- Suppose the economywide demand for money is given by: M = P(0.3Y − 25,000i). The price level P equals 3, and real output Y equals 8,000. a. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 2 percent? The nominal money supply should be set at $ . b. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 3 percent? The nominal money supply should be set at $ .arrow_forwardMoney demand in an economy in which no interest is paid on money is Md p == 500 + 0.2Y - 1000i. a. Suppose that P = 100, Y = 1000, and i = 0.10. Find real money demand, nominal money demand, and velocity. b. The price level doubles from P = 100 to P = 200. Find real money demand, nominal money demand, and velocity.arrow_forward
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