EBK MACROECONOMICS
EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
Question
Book Icon
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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
what is defecit in economy?
what is economic?  and whatis the different between microeconomic and economic?
Where can I go to get my own wax supplies?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Survey Of Economics
Economics
ISBN:9781337111522
Author:Tucker, Irvin B.
Publisher:Cengage,
Text book image
MACROECONOMICS FOR TODAY
Economics
ISBN:9781337613057
Author:Tucker
Publisher:CENGAGE L
Text book image
Economics For Today
Economics
ISBN:9781337613040
Author:Tucker
Publisher:Cengage Learning
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics
Economics
ISBN:9781337617390
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning