Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter A, Problem 6P
a)
To determine
Inflation rate
b)
To determine
Real output
c)
To determine
Growth rate of output.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
It is not possible for the total value of production to increase unless the money supply also increases. After all, how can the value of the goods and services being bought and sold increase unless there is more money available.explain the assertion using the equation
M = money supply, V = velocity of money, P = price level, Y = real GDP.
Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship:
P=A×MP=A×M
•
P=Price LevelP=Price Level
•
M=Money SupplyM=Money Supply
•
A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time.
How might an economist gather empirical data to test the proposed relationship between money and the price level?
Chapter A Solutions
Macroeconomics
Knowledge Booster
Similar questions
- In an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of money V i.e. M = PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) ΔΜ = +g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ebi The nominal interest rate i is determined by i = r" +7, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g = 0.03, r" = 0.05, b =1, and Vo = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is T = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.10? (c) What rate of inflation maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?arrow_forwardIn 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?arrow_forwardIn 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_forward
- Suppose the public expects a 7 percent inflation rate, while the Federal Reserve unexpectedly allows the money growth rate to be 4 percent. In the short run, we expect that investment spending by firms will and consumer durable spending will 000 decrease; decrease increase; increase decrease; increase increase; decreasearrow_forwardIf the money supply (M) is $300, the real GDP (Q) is 200, the velocity of money (V) is 6, the interest rates is 5% and the inflation rate is 3%, then calculate nominal GDP.arrow_forwardThe monetary policy rate is the rate at which the Central Bank of Ghana lends to commercial banks. The results from table 4.4.1 shows that the monetary rate in Ghana declined from 2019 to 2021, before rising in 2022. The decline in the monetary rate from 2019 to 2021 can be attributed to an expansionary monetary policy, which was implemented to boost the economy of Ghana by reducing unemployment. The rise in the monetary rate in 2022 is a sign of a contractionary monetary policy, which is intended to reduce money supply and increase the cost of borrowing. This can help control inflation but may also lead to lower economic growth due to reduced aggregate demand (consumption). Consumption which is a component of GDP, the decrease in Aggregate demand will lead to decrease GDP and economic growth at large. Digitalization has become the norm in all parts of life, including finance. Mobile money has acquired substantial acceptance in Ghana as a simple mechanism for fund transfers, payments,…arrow_forward
- Assume that at a Monetary Policy Committee meeting the South African Reserve Bank decides to increase the repo rate. what is the impact of a higher repo rate be on real production (Y) and pricesarrow_forwardIn an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of i.e. M - PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) money V ΔΜ =*+g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ehi The nominal interest rate i is determined by i = r" +T, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g= 0.03, r" = 0.05, 6 =1, and V" = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a =0.10? (c) What rate of inflation w maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?arrow_forwardA standard "money demand" function used by macroeconomists has the form In(m) = Po + B₁In(GDP) + B₂R, Where m is the quantity of (real) money, GDP is the value of (real) gross domestic product, and R is the value of the nominal interest rate measured in percent per year. Supposed that B₁ = 2.32 and B₂ = -0.02. What is the expected change in m if GDP increases by 9%? The value of m is expected to by approximately %. (Round your response to the nearest integer)arrow_forward
- For the next two questions, consider an economy that has the following information: Its money supply is $2000, growing at a rate of 3 percent annually. The average dollar in this economy is spent 5 times per year. The price level is $2.5; inflation is 2 percent per year. We assume that velocity (income velocity of money) is constant. Calculate this economy's real output. Enter only numbers and a decimal point in your answer as needed. Round your answer to two decimal places as necessary.arrow_forwardConsider a simple economy that produces only loaves of bread. The table contains information on the economy's output, money supply, velocity, and price level. For example, in 2009, the money supply was $200, the price of a loaf of bread was $5, and the economy produced 400 loaves of bread. Use the information in the table and your previous answers. The money supply grew at a rate of % from 2009 to 2010 and the inflation rate (percentage change in prices) grew at a rate of % from 2009 to 2010. [Use one decimal place in your answer] 2009 2010 Quantity of Money $200 $216 Velocity of Money 10 Price Level $5.00 Quantity of Output 400 400arrow_forwardSuppose State Bank of Pakistan (SBP) reduces the money supply by 10 percent. What happens to the aggregate demand curve? Graphically show. What happens to the level of output. the price level, unemployment and the real interest rate in the short run and in the long run? Why does the LM curve slope upward? Suppose that the money demand function is (MiP)" = 1,000 – 100r. where r is the interest ra in percent. The money supply is 1,000 and the price level is 2. i. a. i. (3) ii. (8) b. (3) %3D c. What is the equilibrium interest rate? Assume that the price level is fixed. What happens to the equilibrium interest rate it supply of money is raised from 1.000 to 1,200? If the SBP wishes to raise the interest rate to 10%, what money supply should it som (2) (2)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you