EBK MACROECONOMICS
EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
Question
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Chapter 7, Problem 6NP

a)

To determine

To describe: The values of real money supply and current price level are to be determined when the money supply is growing at rate 10%.

a)

Expert Solution
Check Mark

Answer to Problem 6NP

The real money supply = 10

The current price level = 30

Explanation of Solution

The equation to calculate the real money demand function −L(Y,r+πe)=0.01Yr+πe ………………Equ (1)

Where, r = real interest rate πe = expected inflation

Now, the following equation to calculate the growth of money supply −πe=ΔMM

  πe=0.1 or 10%

Now, put the given values in Equ (1) −L(Y,r+πe)=0.01Yr+πe

  L(Y,r+πe)=0.01×1500.05+0.10

  L(Y,r+πe)=1.50.15=10

At the condition of equilibrium, the real money demand is equal to the real money supply.

Given that,

M = 300

Now, the equation can be represented as −L(Y,r+πe)=MP

Or, P=ML(Y,r+πe) ………………………….Equ (2)

Now, put the given values in Equ (2) −P=30010=30

The price level in the economy = 30

The equation to calculate the real money supply −real Ms=Nominal MsPrice level ……………….Equ (3)

Now, put the calculated values in Equ (3) −real Ms=30030=10

Economics Concept Introduction

Introduction:

The real money supply can be defined as the nominal money supply which is adjusted for the effect of inflation.

b)

To determine

To describe: The values of real money supply and current price level are to be determined when the money supply is growing at rate 5%.

b)

Expert Solution
Check Mark

Answer to Problem 6NP

The real money supply = 15

The current price level = 20

Explanation of Solution

Given that −

The money supply is growing at rate 5%.

The equation to calculate the growth of nominal supply −πe=ΔMM=0.05 or 5%

The equation of the demand function is represented as −L(Y,r+πe)=0.01Yr+πe

Put the given or calculated values in the above equation −L(Y,r+πe)=0.01×1500.05+0.05=1.50.10

  L(Y,r+πe)=15

At the condition of equilibrium, the real money demand is equal to the real money supply.

Given that −

M =300

Now, the equation can be represented as −L(Y,r+πe)=MP

Or, P=ML(Y,r+πe) ………………………….Equ (2)

Now, put the values in above Equ −P=30015=20

The new price level in the economy = 20

The equation to calculate the real money supply −real Ms=Nominal MsPrice level ……………….Equ (3)

Now, put the calculated values in Equ (3) −real Ms=30020=15

The real money supply is 15.

Economics Concept Introduction

Introduction:

The real money supply can be defined as the nominal money supply which is adjusted for the effect of inflation.

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