Homework Help is Here – Start Your Trial Now!
Business
Economics
Explain the quantity theory of money

Explain the quantity theory of money

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
See similar textbooks
icon
Related questions
Question
2. In 2018, assume the economy was at full employment with the following economic data: Real GDP: $7 billion ● Nominal interest rate: 5 percent Price 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 to Nominal GDP. b. Calculate the quantity of money in 2018. c. Assume the central bank made an open market purchase in 2019, increasing the monetary 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 was the inflation rate for 2019? e. Create a graph of the money market reflecting the money supply in 2018 and money demanded in 2018. Be sure to define your equilibrium point. Demonstrate the changes to your market in 2019 assuming the money demand curve does not change and nominal interest rate is 3%. f. Create a graph for the aggregate demand and aggregate supply model in 2018 and define your equilibrium points. Demonstrate the changes to your model in 2019 assuming potential GDP increased by 3%. Identify whether the economy in 2019 is at full employment, is in a recessionary gap, or an inflationary gap.
Transcribed Image Text:2. In 2018, assume the economy was at full employment with the following economic data: Real GDP: $7 billion ● Nominal interest rate: 5 percent Price 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 to Nominal GDP. b. Calculate the quantity of money in 2018. c. Assume the central bank made an open market purchase in 2019, increasing the monetary 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 was the inflation rate for 2019? e. Create a graph of the money market reflecting the money supply in 2018 and money demanded in 2018. Be sure to define your equilibrium point. Demonstrate the changes to your market in 2019 assuming the money demand curve does not change and nominal interest rate is 3%. f. Create a graph for the aggregate demand and aggregate supply model in 2018 and define your equilibrium points. Demonstrate the changes to your model in 2019 assuming potential GDP increased by 3%. Identify whether the economy in 2019 is at full employment, is in a recessionary gap, or an inflationary gap.
Expert Solution
steps

Step by step

Solved in 5 steps with 10 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Quantity Theory of Money
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
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS