Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 7, Problem 4NP
a)
To determine
To Find: The real
b)
To determine
To Find: The new price level and change in price level when nominal money supply increases to 6000.
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Students have asked these similar questions
1) 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?
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)
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Similar questions
- In 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 $6.5 billion. a) Calculate the velocity of money and the price levels in the two years, and then calculate the inflation rate. b) Calculate the inflation rate using the formula AM/M + AV/V = AP/P + AY/Y, where the Greek letter A represents a change and the ratio AM/Mx 100 is the percentage change (or the rate of change) in M. Compare this result with the result you obtained in part a. Why could there be some difference? c) What is the difference between commodity money and fiat money? Why do people accept fiat currency in trade for goods and services?arrow_forwardAssuming the growth rate in the velocity of money is 5$. If real GDP grows by 10% this year, and if the money supply does not change this year, how much does the price level change by? a) -5 b)-10 c) 5 d) 10arrow_forwardQuestion 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_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_forward. Based on your knowledge of the Quantity Theory of Money and the Equation of Exchange, answer the following questions. Assume the money supply is $1,200 billion, the velocity of circulation is 8, and the price level is $6. What is the level of real output and nominal output? Assume the money supply is $1,200 billion, the price level is $6, and velocity remains constant. What will happen if the money supply rises by 10%?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
- The Quantity Theory of Money (QTM) states that ______. Note: the blank represents an entire phrase, not one word. (a) In the long run, an increase in the money supply will generate an equivalent increase in the velocity of money. (b) In the long run, an increase in the money supply will generate an equivalent increase in real GDP. (c) In the long run, an increase in the velocity of money will generate an equivalent increase in the price level. (d) In the long run, an increase in the money supply will generate an equivalent increase in the price level.arrow_forward1. If the present inflation rate is 5% and the existing nominal interest rate is 10%, holding other things constant, what do you expect to happen (according to the Fisher effect) to the nominal interest rate if inflation falls to 2%? 2. If the quantity of money increases by 10%, while money velocity and production stay constant, what has to happen to the price level according to the quantity equation?arrow_forward1. Nominal GDP =P*Y, where P is the price level and Y is aggregate output (income) . We know from class slides that the velocity of money links money supply and nominal GDP. Given nominal GDP in a year is $10 trillion and the quantity of money (M1) is $2 trillion, what is the velocity? What is the meaning of this calculated velocity? 2. Suppose that real money demand is represented by the equation M“/P= 0.25×Y. Calculate the velocity of money. 3. Consider a five year $1000 semiannual coupon bond with a 5% coupon rate. If the bond is current trading for a price of $957.35, what is the bond's yield to maturity? If the bond's yield to maturity increase a little bit, what will the bond's price be? 4. Suppose a 7-year, $1,000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%. Is this bond currently trading at a discount, at par, or at a premium? Explain. If the yield to maturity of the bond rises to 7%, what price will the bond trade for? 5.…arrow_forward
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