Question 2: Suppose the money supply is $50 in an economy where the nominal GDP is $1000, and the real GDP is $500. a) Can you calculate the price level? b) Can you calculate the money velocity? c) Now suppose output increases by 10 percent and the velocity is constant. Suppose Fed wants to keep prices constant through monetary

Question 2: Suppose the money supply is $50 in an economy where the nominal GDP is $1000, and the real GDP is $500. a) Can you calculate the price level? b) Can you calculate the money velocity? c) Now suppose output increases by 10 percent and the velocity is constant. Suppose Fed wants to keep prices constant through monetary

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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6. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 5.5 5.0 New MS Curve Money Demand 4.5 4.0 3.5 3.0 2.5 2.0 1.5 0 0.1 0.2 Money Supply 0.3 0.4 0.5 0.6 0.7 0.8 MONEY (Trillions of dollars) New Equilibrium (?) Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing…
1. The growth rate of the money supply in a particular year was 8.5%. What was the growth rate of real GDP if the inflation rate in the same year was 4%? 2. During a recession, the Fed enacts countercyclical policy, by changing the quantity of reserves. To fight recession, how will the Fed adjust the quantity of reserves in the market (to S₁ or S₂)? Explain how the Fed can operationalize that. Fed funds rate () S I 1 I I 1 T I 1 1 1 1 I || I I 1 1 1 1 So I I 1 1 I 1 I I 1 1 I 1 1 J I I 1 1 + I I I I 2 D Quantity of reserves 3. Explain why the zero lower bound is a problem for monetary policy. If there's a recession and the Central Bank is at a zero lower bound, what monetary policies can it pursue to stimulate the economy?
Money velocity in the country of Ecoland is always stable. In 2019 (the base year), the money supply was $250 billion. In 2020, the money supply increased to $350 billion, the price level increased by 25 percent, and nominal GDP equaled $1400 billion. By how much did real GDP increase between 2019 and 2020? A) $15 billion B) $ 50 billion C) $12.5 billion D) $150 billion
The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Price Level (P) Value of Money (1/P) 0.80 1.00 1.33 2.00 Quantity of Money Demanded (Billions of dollars) 2.0 2.5 4.0 8.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $2.5 billion. money Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.
Suppose the Federal Reserve (the US central bank) increases the money stock. Which of the following statements describes the effect of monetary expansion on real GDP and the price level in the Short Run? A) The price level will increase, and real GDP will remain at its natural level. B) The price level will increase, and real GDP will increase above its natural level. C) The price level will decrease, and real GDP will remain at its natural level. D) The price level will decrease, and real GDP will decrease below its natural level.
Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it ha a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 6.0 5.5 5.0 45 4.0 35 3.0 25 20 0 Money Demand 0.1 Money Supply 0.2 03 0.4 0.5 0.6 0.7 MONEY (Trillions of dollars) 08 4 New MS Curve New Equilibrium Ⓒ image 1 Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the…
Suppose an economy has a price index at 19, real GDP of $11.83 trillion, and a money supply (M2) of $21.79 trillion. What is the M2 velocity of money for this economy? Round this to two digits after the decimal.
The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed’s primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves. A decrease in the interest rate on reserves tends to (decrease or increase) the reserve ratio, (decreases or increases) the money multiplier, and (decrease or increase) the money supply.
If the money supply is $60 and nominal GDP is $360, then Group of answer choices A) the velocity of money must be 300. B) the velocity of money must be 4.2. C) the velocity of money must be 3. D) the velocity of money must be 60. E) the velocity of money must be 6.
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We would expect that the level of income that would equate total demand for and total supply of money would be: (a) roughly at the level of the Fed’s interest rate target; (b) lower the lower the interest rates; (c) equal to the level that would equate realized investment with realized savings; (d) higher the lower the interest rate (or lower the higher the interest rate)
QUESTION THREE Assuming a constant velocity of money while the money supply is growing 10% per year, real GDP is growing at 4% per year, and the real interest rate is r = 8%. Assume that actual Inflation is equal to expected inflation. a) Find the value of the nominal interest rate in this economy b) If the central bank increases the money growth rate by 4% per year, find the change in the nominal interest rate Ai C) Suppose the growth rate of Y falls to 2% per year. What will happen to inflation? What must the central bank do if it wishes to keep inflation constant?