6. Consider an economy with constant nominal money supply, constant real output Y : 200, and constant real interest rate r = 0.1. Suppose that the income elasticity of money demand is 0.5 and the interest rate elasticity of money demand is -0.1. Also, assume that expected inflation is zero and does not change (rº = 0). This implies that the nominal interest rate is equal to the real interest rate. Suppose that the real interest rate decreases to r = rate of the interest rate is (0.08 – 0.1)/0.1 = -0.2. How much should real output grow in order for the equilibrium price level to remain at its initial value (zero inflation)? 0.08. This implies that the growth (а) -0.02. (b) 0.01. (c) 0.02. (d) -0.04. (Right answer)

6. Consider an economy with constant nominal money supply, constant real output Y : 200, and constant real interest rate r = 0.1. Suppose that the income elasticity of money demand is 0.5 and the interest rate elasticity of money demand is -0.1. Also, assume that expected inflation is zero and does not change (rº = 0). This implies that the nominal interest rate is equal to the real interest rate. Suppose that the real interest rate decreases to r = rate of the interest rate is (0.08 – 0.1)/0.1 = -0.2. How much should real output grow in order for the equilibrium price level to remain at its initial value (zero inflation)? 0.08. This implies that the growth (а) -0.02. (b) 0.01. (c) 0.02. (d) -0.04. (Right answer)

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter24: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 8PA

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