Suppose that velocity and output are constant, and that the quantity theory and Fisher effect are both correct. If nominal interest rates are 6.5 percent and the inflation rate is 2.0 percent it follows that the money supply growth rate is 2.0 percent. Bit follows that the money supply growth rate is 4.5 percent. it follows that the real interest rate is 4.5 percent. it follows that the real interest rate is 2.0 percent. Both A and C

Suppose that velocity and output are constant, and that the quantity theory and Fisher effect are both correct. If nominal interest rates are 6.5 percent and the inflation rate is 2.0 percent it follows that the money supply growth rate is 2.0 percent. Bit follows that the money supply growth rate is 4.5 percent. it follows that the real interest rate is 4.5 percent. it follows that the real interest rate is 2.0 percent. Both A and C

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 5PA

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1. 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?
Calculate what happens to nominal GDP if velocityremains constant at 4 and the money supply increasesfrom $250 billion to $375 billion
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?
If the demand for money depends positively on real income and depends inversely on the nominalinterest rate, what will happen to the price level today if the central bank credibly announces thatit will decrease the money growth rate in the future, but it does not change the money supplytoday?
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.
Suppose the money demand function is ▪ Md/P = 1000+ 0.2Y - 1000 (r + πе). (a) Calculate velocity if Y = 2000, r = .06, and Te = .04. (b) If the money supply (Ms) is 2600, what is the price level? "(c) Now suppose the real interest rate rises to 0.11, but and Ms are unchanged. What happens to velocity, and the price level? So if the hominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?
u are considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year Inflation-Plus CD offering 1.5% per year plus the rate of inflation. Which is the safer investment? Can you tell which offers the higher expected return? If you expect the rate of inflation to be 3% over the next year, which is the better investment? Why? If we observe a risk-free nominal interest rate of 5% per year and a risk-free real rate of 1.5% on inflation-indexed bonds, can we infer that the market's expected rate of inflation is 3.5% per year？
If the velocity of circulation is growing at 1 percent a year, the real inter- est rate is 2 percent a year, the nominal interest rate is 7 percent a year, and the growth rate of real GDP is 3 percent a year, calculate the inflation rate, the growth rate of money, and the growth rate of nominal GDP.
E4 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.
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Suppose there is an upward surge in consumer confidence. a) If the output gap is large and positive, the Fed should (Click to select) fed funds rate. the the fed funds b) If the output gap is negative, the Fed should (Click to select) rate. c) If the inflation rate is 6 percent per year, the Fed should (Click to select) fed funds rate. the Next> 16 of 19 < Prev tion 10:38 PM 10/5/2019