2. In 2018, assume the economy was at full employment with the following economic data:Real GDP: $7 billion●Nominal interest rate: 5 percentPrice level: 1.5.• Velocity of circulation: 7• Required reserve ratio: 10%.a.Explain the quantity theory of money and how each side of the equation relates toNominal GDP.b. Calculate the quantity of money in 2018.c. Assume the central bank made an open market purchase in 2019, increasing themonetary base by $10 million. What is the increase to the money supply?d. In 2019 the velocity of circulation did not change, and real GDP grew by 5%. What wasthe inflation rate for 2019?e.Create a graph of the money market reflecting the money supply in 2018 and moneydemanded in 2018. Be sure to define your equilibrium point. Demonstrate the changesto your market in 2019 assuming the money demand curve does not change and nominalinterest rate is 3%.f. Create a graph for the aggregate demand and aggregate supply model in 2018 and defineyour equilibrium points. Demonstrate the changes to your model in 2019 assumingpotential GDP increased by 3%. Identify whether the economy in 2019 is at fullemployment, is in a recessionary gap, or an inflationary gap.

The relationship between the total amount of money in an economy and the level of prices is examined…

Answered: Explain the quantity theory of money

Business

Economics

Explain the quantity theory of money

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter13: Monetary Policy

Section: Chapter Questions

Problem 6E

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