Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 32, Problem 2.1P
Subpart (a):
To determine
Monetarist’s prediction on the rate of inflation.
Subpart (b):
To determine
Keynesian’s prediction on the rate of inflation.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
As part of its efforts to restore confidence in the banking and specialized deposit-taking sectors, the Bank of Ghana embarked on a clean-up exercise in August 2017 to resolve insolvent financial institutions whose continued existence were thought to pose risks to the interest of depositors. In 2019, the Bank of Ghana released a statement saying it had completed its clean-up exercise of the banking and specialized deposit-taking (SDI), and non-banking financial institutions (NBFI) sectors.As a student of Financial Markets and Institutions, provide reasons for or against the cleanup exercise embarked upon by the Central Bank.
Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), while South Korea had relatively robust output growth (5%). Suppose the Bank of Japan allowed the money supply to grow by 1% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. Treat South Korea as the home country and Japan as the foreign country, and use the simple monetary model (with constant L) to answer the following questions:
a. What is the inflation rate in South Korea ()? How about Japan ()?
b. What is the expected rate of depreciation in the Korean won relative to the Japanese yen?
c. Suppose the Bank of Korea decreases the money growth rate from 15% to 10%. What is the new inflation rate in South Korea?
d. Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s nominal money supply MK; prices PK, real money…
Three countries are in a currency union. The countries are identical in that each has the same
equilibrium level of output of £50 billion consistent with the same real interest rate of 2%, but each
country is currently experiencing a different level of inflation as shown in Table 1. If the central bank for
the currency union sets its (nominal) base rate at 7%, which one of the countries is likely to see an
increase in its aggregate demand? (Hint: you need to use the real interest rate equation given in Chapter
8, Section 2.2 and may wish to review Chapter 8, Section 2.4.)
Table 1 Information about three countries
Country A
Country B
Country C
Equilibrium output
£50 billion
£50 billion
£50 billion
Equilibrium real
2%
2%
2%
interest rate
Inflation rate
2%
5%
9%
Select one:
O Country A
O Country B
O Country C
MacBook
80
DIN
F1
F2
F3
F4
F5
F6
F7
FE
@ €
£ #
$
&
*
2
3
4
7
8.
Q
W
E
R
Y
CO
Chapter 32 Solutions
Principles of Economics (12th Edition)
Knowledge Booster
Similar questions
- Although it is a member of the European Community, Denmark is not part of the eurozone; it has its own currency, the krone. Because the krone is pegged to the euro, Denmark's central bank is obliged to maintain the value of the krone within 2.25 percent either above or below the value of the euro. According to an article in the Wall Street Journal, in 2017, the Danish central bank was forced to intervene in foreign currency markets "to keep the krone from strengthening too much." If the krone was strengthening, did it take more kroner to exchange for a euro or fewer kroner? Briefly explain. More kroner, because the krone has more value. Fewer kroner, because the krone has less value. Fewer kroner, because the krone has more value. More kroner, because the krone has less value.arrow_forwardThe graph below shows relationship between the average annual increase in the price level and the average annual increase in money supply across eight countries. What concept or model, related to monetary policy, does this graph help demonstrate?arrow_forwardConsider two countries: Japan and Korea. In 1996 Japan experienced relatively slow output growth (1%), while Korea had relatively robust output growth (5%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, while the Bank of Korea chose to maintain a relatively high money growth of 10% per year. The bank deposits in Japan pay a 3% interest rate (i.e., i j = 3%). (1) What is the inflation rate in Korea? (2) What is the inflation rate in Japan?arrow_forward
- To ensure that paper money will be accepted, the U.S. government implicitly promises the public that Group of answer choices it will not change currency denominations so that the paper currencies U.S. citizens have will continue to be used for exchanges. the U.S. monetary system will always be backed by a precious metal. it will not print money so fast that it loses its value. it will not change the rate at which the dollar is exchanged for other currencies.arrow_forwardThe table below shows hypothetical values, in billions of dollars, of different forms of money. Use the table to calculate the M1 and M2 money supplies for each year, as well as the growth rates of the M1 and M2 money supplies from the previous Why are the growth rates of M1 and M2 so different? 2019 2020 2021 2022 A Currency 880 895 900 906 B Money market mutual fund shares 680 685 683 692 C Saving account deposits 5500 5780 5968 6105 D Money market deposits accounts 1214 1245 1274 1329 E Demand and checkable deposits 1000 972 980 993 F Small denomination time deposits 840 871 1133 1576 G Traveler’s check 5 5 4 3 H 3-month treasury bills 1986 2374 2436 2502arrow_forwardScenario 29-1 The Monetary Policy of Jaune is controlled by the country's central bank known as the Bank of Jaune. The local unit of currency is the Jaunian dollar. Aggregate banking statistics show that collectively the banks of Jaune hold $240 million of required reserves, $60 million of excess reserves, have issued $6,000 million of deposits, and hold $480 million of Jaunian Treasury bonds. Jaunians prefer to use only demand deposits and so all money is on deposit at the bank. Refer to Scenario 29-1. Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What is the reserve requirement and the reserve ratio for Jaunian Banks? O 5 percent, 8 percent 4 percent, 8 percent 4 percent, 5 percent 5 percent, 4 percentarrow_forward
- Assuming $2 billion in gold reserves at the Central Bank, if the Central Bank holds reserves of 20% and the commercial banking system holds reserves of 15%, what will be the ratio of gold reserves to commercial bank notes and deposits? Assuming $3 billion in gold reserves, if the Central Bank holds reserves of 50% and the commercial banking system holds reserves of 10%, what will be the ratio of gold reserves to commercial bank notes and deposits? Make the balance sheets of the Central Bank and the commercial banking system based on the numbers given in question 2 above.arrow_forward[Related to the Economics in Practice on p. 392] Explain why the European Central Bank cannot selectively change interest rates in any of the 16 EU countries that have adopted the euro—for example, lowering the interest rate to stimulate the economies of Greece, Ireland, or Spain, while maintaining the interest rate in other countries?arrow_forwardHow did the European Monetary System differ from the Bretton Woods system? (explain in 10-12 sentences)arrow_forward
- Initially, the Republic of Gorgonzola has no commercial banking system. To make trading easier and eliminate the need for barter, the government directs the central bank of Gorgonzola to put into circulation 4,000,000 identical paper notes, called guilders. The central bank prints the guilders and distributes them to the people. At this point the Gorgonzolan money supply is 4,000,000 million guilders.In order to keep the money safe, some Gorgonzolan entrepreneurs set up a system of commercial banks. When people need to make a payment, they can either withdraw their guilders or write a check on their account. Checks give the banks permission to transfer guilders from the account of the person paying by check to the account of the person to whom the check is made out. With a system of payments based on checks, the paper guilders need never leave the banking system, although they flow from one bank to another as a depositor of one bank makes a payment to a depositor in another bank.…arrow_forwardOn the previous graph, use the purple line (diamond symbol) to show how the stabilization fund managers have to adjust the value of the Russian ruble to ensure it meets the official requirement. (Hint: You need to draw either a new supply curve or a new demand curve. Make sure the new curve is parallel to the given supply or demand curve. Position your cursor over the given curves to see their slopes.) The managers will effectively million rubles.arrow_forwardIn the hypothetical country of Westlandia, banks are required to hold 20% of checkable deposits as reserves, and the public holds 50% of the loans as currency in circulation and redeposits the remaining 50% percent of the loans. Complete the table (calculations should be to no more than two decimal places). Round Deposits Required Reserves of 20% Excess Reserves New Loans 50% of loan proceeds are held as currency in circulation by people Loan proceeds redeposited 1 $500 2 3 4 5 6 7 8 9 10 Totals Calculate the new money supply. Calculate the money multiplier.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
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)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
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-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education