Consider an economy with constant nominal money supply M=100, constant real output Y = 100, 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 (ne = 0). This implies that the nominal interest rate is equal to the real interest rate. By what percentage does the equilibrium price level differ from its initial value if output increases to Y = 120, money supply doubles but r remains at 0.1? O A. 90% O B. 50% O C. 3% O D. 0.9%
Consider an economy with constant nominal money supply M=100, constant real output Y = 100, 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 (ne = 0). This implies that the nominal interest rate is equal to the real interest rate. By what percentage does the equilibrium price level differ from its initial value if output increases to Y = 120, money supply doubles but r remains at 0.1? O A. 90% O B. 50% O C. 3% O D. 0.9%
Chapter7: Inflation
Section: Chapter Questions
Problem 14SQ
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ISBN:
9781337617383
Author:
Roger A. Arnold
Publisher:
Cengage Learning