Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 7, Problem 4NP
a)
To determine
To Find: The real
b)
To determine
To Find: The new
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1) Assume that the quantity theory of money holds and that velocity is constant at 5.
Output is fixed at its full-employment value of 10,000, and the price level is 2.
a) Determine the real and the nominal demand for money.
b) The government fixes the nominal money supply in this same economy at 5,000.
With output fixed at its full-employment level and assuming that prices are flexible,
what will be the new price level? What happens to the price level if the nominal
money supply rises to 6000?
Assume that the quantity theory of money holds and that velocity is constant at 4. Output is fixed at its full-employment value of 42,000, and the price level is 1.00.
a. Determine the following:
Real demand for money: 10500 (enter your response as an integer)
Nominal demand for money: 10500 (enter your response as an integer)
b. In this same economy the government fixes the nominal money supply at 7,500. With output fixed at its full-employment level and with the assumption that prices
are flexible, what will be the new price level?
P=(enter your response as a decimal rounded to two decimal places).
Assume that the quantity theory of money holds and that velocity is constant at 4. Output is fixed at its full-employment value of 18,000, and the price level is 1.25.
a. Determine the following:
Real demand for money:
(enter your response as an integer)
Nominal demand for money:
(enter your response as an integer)
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- 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.arrow_forwardSuppose the economywide demand for money is given by: M = P(0.3Y − 25,000i). The price level P equals 3, and real output Y equals 8,000. a. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 2 percent? The nominal money supply should be set at $ . b. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 3 percent? The nominal money supply should be set at $ .arrow_forwardSuppose that velocity of money is constant, the expected inflation rate is always equal to the actual inflation rate, and the expected real interest rate is 3%. Answer the following questions. Justify your answers. -When the growth rate of the money supply is 8% and the growth rate of real GDP is 2%, what is the nominal interest rate?arrow_forward
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