Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 32, Problem 2.4P
To determine
Quantity theory of money.
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Explain how an increase in government expenditure can affect the goods market and moneymarket by taking the link between the two markets into account.
Consider a simple economy that produces
only pies. The following table contains
information on the economy's money supply,
velocity of money, price level, and output. For
example, in 2012, the money supply was $280,
the price of a pie was $7.00, and the economy
produced 600 pies.
Fill in the missing values in the following table,
rounding to the nearest cent when necessary.
Year Quantity of Money Velocity of Money Price Level Quantity of Output Nominal GDP
(Dollars) (Dollars)
(Pies)
(Dollars)
2012 280
2013 294
15
7.00
600
600
The money supply grew at a rate of
from 2012 to 2013. Since pie output did not
change from 2012 to 2013 and the velocity of
money, the change in the money supply was
reflected in changes in the price level. The
inflation rate from 2012 to 2013 was
If nominal money demand is proportional to nominal income, by how much will real money demand increase if real income rises 10%.
Chapter 32 Solutions
Principles of Economics (12th Edition)
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- According to your graph, the equilibrium value of money is , therefore the equilibrium price level is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. In order to reduce the money supply, the Fed can use open market operations to the public. Use the purple line (diamond symbol) to plot the new money supply (MS2 ). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will and the value of money willarrow_forwardNeed help with this, Thanks!arrow_forwardSee Hint Suppose the country of Inflatistan had a nominal GDP of $51 billion in 2010 and a nominal GDP of $113 billion in 2016. If the price level was 100 in 2010 and 184 in 2016, what was the real GDP in 2016 (using 2010 dollars)? Round to the nearest billion. billionarrow_forward
- Consider a simple economy that produces only pies. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2019, the money supply was $360, the price of a pie was $4.50, and the economy produced 800 pies. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Quantity of Money Quantity of Output Nominal GDP (Dollars) Price Level Year Velocity of Money (Dollars) 360 (Dollars) 4.50 (Pies) 800 2019 2020 378 10 800 the change in the money supply was The money supply grew at a rate of reflected from 2019 to 2020. Since pie output did not change from 2019 to 2020 and the velocity of money in changes in the price level. The inflation rate from 2019 to 2020 wasarrow_forwardThe growth rate of real GDP is 6.4% The growth rate of nominal GDP is 7.8% The nominal interest rate is 4.2% The real interest rate is 2.8% The money supply (M2) is $11,438(in billions) Use the information given above to calculate the inflation rate. According to the quantity theory of money, if in a year's time, real GDP grew from $10 trillion to $10.2 trillion, and nominal GDP for the same time period grew from $10 trillion to $10.5 trillion, what is the growth rate of money supply? And the inflation rate?arrow_forwardThe 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 (MS) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.arrow_forward
- Homework Question 22: Hyperdeflation Can Be a Bit Cryptic to Understand Bitcoin is an electronic currency, which means that instead of having physical notes and coins, the currency only exists online. Bitcoins are unique in that there is no entity or individual that can increase the supply of Bitcoins. Instead Bitcoins are created by a computer algorithm that currently adds a fixed number of Bitcoins into circulation every hour, the algorithm is designed to gradually reduce the number of Bitcoins being produced, eventually reaching a growth rate of zero in 2040. You have been given the task of thinking about the potential for Bitcoin to become widely Only a small group of online vendors initially accepted Bitcoin but more and more are accepting it over time in other words the volume of goods and services that can be purchased with Bitcoin has been rising rapidly. a) Reformulate the Quantity Theory of Money to apply to Bitcoin, i.e define what M, P, V and Y are in the context of…arrow_forwardExplain why deflation might be considered to be an economic problem.arrow_forwardThe 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) 1.00 1.33 2.00 4.00 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. 1.25 Assume that the Federal Reserve initially fixes the quantity of money supplied at $2.5 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. (?) moneyarrow_forward
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