Consider the money supply Ms=mxB , m=r+1 cr+rr Assume that the demand for real money is given by the equation (M/P)d%=0.25Y, and that the output has been growing 3% per year. Assume, further, that you have been called before Congress to testify about the long-run effects of increasing the growth of the money supply to 10 % per year. 1. State, compute and explain the long-run effects of this change on the inflation rate, on the nominal interest rate, on the real interest rate, on investment and on the real GDP. For each of them, argue both using the formulae that we studied and the macroeconomic dynamic beyond the effect.
Consider the money supply Ms=mxB , m=r+1 cr+rr Assume that the demand for real money is given by the equation (M/P)d%=0.25Y, and that the output has been growing 3% per year. Assume, further, that you have been called before Congress to testify about the long-run effects of increasing the growth of the money supply to 10 % per year. 1. State, compute and explain the long-run effects of this change on the inflation rate, on the nominal interest rate, on the real interest rate, on investment and on the real GDP. For each of them, argue both using the formulae that we studied and the macroeconomic dynamic beyond the effect.
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
Related questions
Question
![Exercise 1
cr+1
Consider the money supply Ms=mxB , m =
cr+rr
Assume that the demand for real money is given by the equation (M/P)d=0.25Y, and that the output has
been growing 3% per year.
Assume, further, that you have been called before Congress to testify about the long-run effects of
increasing the growth of the money supply to 10 % per year.
1. State, compute and explain the long-run effects of this change on the inflation rate, on the nominal
interest rate, on the real interest rate, on investment and on the real GDP. For each of them, argue
both using the formulae that we studied and the macroeconomic dynamic beyond the effect.
2. Compute the implied money velocity. Suppose that the actual nominal value of the output (PY) is
1000, the value of the reserves is 50 and the toal value of the deposits is 75. Find the actual money
multiplier.
3. State the different ways in which the central bank can achieve the change (+10%) in the money
supply (think about the variables that can affects Ms), arguing about the pros and cons of each one.
Which one do you think is better and why?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6d1172b0-f995-498e-8ccc-349d8eccb717%2Fa9543245-d135-4122-af72-f750cb8fa825%2Fgbr269a_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Exercise 1
cr+1
Consider the money supply Ms=mxB , m =
cr+rr
Assume that the demand for real money is given by the equation (M/P)d=0.25Y, and that the output has
been growing 3% per year.
Assume, further, that you have been called before Congress to testify about the long-run effects of
increasing the growth of the money supply to 10 % per year.
1. State, compute and explain the long-run effects of this change on the inflation rate, on the nominal
interest rate, on the real interest rate, on investment and on the real GDP. For each of them, argue
both using the formulae that we studied and the macroeconomic dynamic beyond the effect.
2. Compute the implied money velocity. Suppose that the actual nominal value of the output (PY) is
1000, the value of the reserves is 50 and the toal value of the deposits is 75. Find the actual money
multiplier.
3. State the different ways in which the central bank can achieve the change (+10%) in the money
supply (think about the variables that can affects Ms), arguing about the pros and cons of each one.
Which one do you think is better and why?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Essentials of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781337091992/9781337091992_smallCoverImage.gif)
Essentials of Economics (MindTap Course List)
Economics
ISBN:
9781337091992
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Brief Principles of Macroeconomics (MindTap Cours…](https://www.bartleby.com/isbn_cover_images/9781337091985/9781337091985_smallCoverImage.gif)
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Essentials of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781337091992/9781337091992_smallCoverImage.gif)
Essentials of Economics (MindTap Course List)
Economics
ISBN:
9781337091992
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Brief Principles of Macroeconomics (MindTap Cours…](https://www.bartleby.com/isbn_cover_images/9781337091985/9781337091985_smallCoverImage.gif)
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning