Topic: Quantity theory of money. Answer 1, 2 and 3. What will happen to nominal GDP if, instead, the money supply decreases by 8 percent and velocity does not change? What will happen to nominal GDP if, instead, the money supply increases by 5 percent and velocity decreases by 5 percent? What happens to the price level in the short run in each of these three situations?

Topic: Quantity theory of money. Answer 1, 2 and 3. What will happen to nominal GDP if, instead, the money supply decreases by 8 percent and velocity does not change? What will happen to nominal GDP if, instead, the money supply increases by 5 percent and velocity decreases by 5 percent? What happens to the price level in the short run in each of these three situations?

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter15: Monetary Theory And Policy

Section: Chapter Questions

Problem 3.7P

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8. Within the classical form of the quantity theory, the demand for money is given by Md = kPY Suppose income (Y) is given at 400 units, and the money supply (M) is fixed at 200 units. Suppose k drops from its initial value of 0.5 to 0.25. What is the new price level after the change in k? Explain the process that leads to the change in the aggregate price level.
Assume the money supply is $600, the velocity of money is 6, and the price level is $3. Using the quantity theory of money: a. Determine the level of real output. b. Determine the level of nominal output. c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent? d. If the government established price controls and also raised the money supply 5 percent, what would happen? Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.
Question: Consider an economy where the velocity of money is constant, and the economy is at full employment. If the central bank decides to increase the money supply by 5% but at the same time, the government imposes new taxes that effectively remove 5% of the consumers' disposable income, what would be the likely short-term effect on the nominal Gross Domestic Product (GDP) and the general price level? A) Nominal GDP remains unchanged; the general price level increases. B) Nominal GDP increases; the general price level remains unchanged. C) Nominal GDP remains unchanged; the general price level decreases. D) Nominal GDP increases; the general price level increases. Please don't use chatgpt it is giving wrong answer. Please try do it with yourself.
Question 7. Using the models learned in class, graphically illustrate and explain the impact of the following policy and explain your answer. Suppose the Bank of Canada reduces the money supply by 5%. a. What happens to the aggregate demand curves? b. What happens to the level of output and the price level in the short run and in the long run? c. What happens to the real interested rate in the short run and in the long run?
Please help me with drawing and explanations of all four steps. The axes should be Money Supply (as X) and Money Value (as Y). (KEY QUESTION) Draw the supply/demand for money diagram to show the following effects: a. Assume that the economy records an increase in real GDP. Show the effect of this on money demand. Assuming the central bank does not respond, how will this affect the value of money and the equilibrium price level? b. Now assume that the central bank does respond to this change in order to keep the price level at the original level. How should they go about it? Show their action on a diagram. c. Returning to part a, assume that together with the increase in GDP there is a decrease in the velocity of money. First explain what exactly this means, and then describe how your answers in parts a. and b. change, using a new diagram. d. Now consider a new situation (i.e. disregard the changes in the previous parts). Assume that the central bank increases the amount of money in the…
6) State how each of the following would affect the quantity of money demanded. Does the change cause a movement along the money demand curve or a shift of the money demand curve (state the direction of the shift or movement)? a) Interest rates rises from 5% to 8%. b) The consumer price index (CPI) rises in the economy.
Problem four For this question, refer to the Bank of Ghana's Monetary Policy Committee Press Release of May 21, 2018. a) Explain the difference between monetary loosening and monetary tightening. According to the statement, the MPC reduced the monetary policy rate by 100 basis points. Does this constitute a monetary loosening or monetary tightening? Explain. b) When deciding whether to tighten or loosen monetary policy, central banks weigh the relative risks to price stability and growth. Mention two indicators that the MPC use to gauge the risk to inflation and two indicators the MPC use to gauge the risk to growth. c) Based on the information in the Press Release, in the thinking of the MPC did the risk to growth outweighed the risk to inflation or vice versa? Refer to specific points from the press release to back up your argument. d) Using the money market diagram studied in class, explain the effect of this policy measure on the real interest rate. e) In ordinary language, explain…
Question 6. Suppose that money supply and money demand determine the price level (P) in an economy. As shown in the equation below, in equilibrium, money demand equals to money supply. Equilibrium M L(r +Er,Y) P The supply of real money balances Real money demand where M is the quantity of money, P is the price level, r is the real interest rate, En is the expected inflation, and Y is the national income. a. Does the real money demand positively or negatively depend on nominal interest rate, į =r+Ex? Does the real money demand positively or negatively depend on national income, Y? Why? Briefly explain your answer. b. For given values of r, Y and M, explain how nominal interest rate (i), real money demand, and price level (P) respond to an increase in Er. Briefly explain your answer.
4. Velocity and the quantity equation Consider a simple economy that produces only air fryers. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2021, the money supply was $400, the price of a air fryer was $12.50, and the economy produced 800 air fryers. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Year 2021 2022 Quantity of Money (Dollars) 400 408 Velocity of Money The money supply grew at a rate of money 2021 to 2022 was 25 Price Level (Dollars) 12.50 Quantity of Output (Air fryers) 800 800 Nominal GDP (Dollars) from 2021 to 2022. Since air fryer output did not change from 2021 to 2022 and the velocity of the change in the money supply was reflected in changes in the price level. The inflation rate from
Question 45 By definition, the velocity of money is the a) difference between this year's inflation rate and last year's. b) inverse of the time the average commercial transaction takes. c) number of individual commercial transactions occurring each year. d) rate at which the money supply is growing. e) number of times per year a unit of money changes hands.
Question 3 Suppose a central bank is committed to hitting a price level target. An unanticipated increase in nominal spending will cause the price level to (relative to its previous trajectory). The central (relative to its previous trajectory) in order to hit its price level target. bank will respond by rise; increasing the money supply rise; decreasing the money supply fall; increasing the money supply fall; decreasing the money supply
2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 0.80 1.25 2.0 1.00 1.00 2.5 1.33 0.75 4.0 2.00 0.50 8.0 mon Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the more the typical transaction requires, and the more money people will wish to hold in the form of currency or demand deposits. Assume that the Fed initially fixes the quantity of money supplied at $4 billion. 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. 2.00 O 1.75 MS₁ 1.50 1.25 Money Demand 1.00 0.75 MS₂ 0.50…