Question 1 government purchases are 2000. Desired consumption and desired investment are as follows: An economy has full-employment real output of 9000, and Real Interest Rate (%) Desired Consumption Desired Investment 1500 1400 1300 6100 1.5 6000 5900 2.5 3 5800 5700 1200 1100 In this economy, suppose that the real money demand function is 0.01Y L(Y, r + nº) = %3D r+ne> where Y is real output, r is the real interest rate, and T is the expected rate of inflation. Real output is constant at the full-employment level over time. The real interest rate is fixed in good markets equilibrium per year a. Interpret the income elasticity of money demand and the interest elasticity of money demand, as well as the real money demand function. b. Suppose that the nominal supply is growing at the rate of 25% per year and this growth rate is expected to persist forever. Currently, the nominal money supply is M-1500. What are the values of the real money supply, the nominal interest rate and the current price level? (Hint: Use Quantity Theory of Money where the velocity of money is constant.)

Question 1 government purchases are 2000. Desired consumption and desired investment are as follows: An economy has full-employment real output of 9000, and Real Interest Rate (%) Desired Consumption Desired Investment 1500 1400 1300 6100 1.5 6000 5900 2.5 3 5800 5700 1200 1100 In this economy, suppose that the real money demand function is 0.01Y L(Y, r + nº) = %3D r+ne> where Y is real output, r is the real interest rate, and T is the expected rate of inflation. Real output is constant at the full-employment level over time. The real interest rate is fixed in good markets equilibrium per year a. Interpret the income elasticity of money demand and the interest elasticity of money demand, as well as the real money demand function. b. Suppose that the nominal supply is growing at the rate of 25% per year and this growth rate is expected to persist forever. Currently, the nominal money supply is M-1500. What are the values of the real money supply, the nominal interest rate and the current price level? (Hint: Use Quantity Theory of Money where the velocity of money is constant.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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