Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
expand_more
expand_more
format_list_bulleted
Question
Chapter 5, Problem 4PA
(a)
To determine
The demand for real money balance.
(b)
To determine
The velocity of money.
(c)
To determine
The changes in the velocity of money.
(d)
To determine
The growth rate of velocity.
(e)
To determine
The money supply growth.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Question 5. Consider an economy in which the money demand function takes the form:
(M/P = L (i, Y) = Y/(Si)
a. If output grows at rate g, at what rate will the demand for real balances grow
(assuming constant nominal interest rates)?
b. What is the velocity of money in this economy?
c. If inflation and nominal interest rates are constant, at what rate, if any, will velocity
grow?
d. (How will a permanent (once-and-for-all) increase in the level of interest rates affect
the level of velocity? How will it affect the subsequent growth rate of velocity?
The following equation is a money demand function
Md /P = f(y,I)
a. Explain the equation
b. Show that velocity of circulation of money is not constant
c. What will happen to money demand if the nominal interest rate declines?
Assume that a country's money velocity remains constant and that the rate of money growth is 4%. A) What is the rate of spending growth? B) If money growth increases by 1.5 percentage points and consumption growth increases by 0.5 percentage points, what is the new rate of spending growth? C) Given your answer in Part B, what is the long-run rate of real GDP growth at an inflation rate of 4%?
Knowledge Booster
Similar questions
- We would expect that the level of income that would equate total demand for and total supply of money would be: (a) roughly at the level of the Fed’s interest rate target; (b) lower the lower the interest rates; (c) equal to the level that would equate realized investment with realized savings; (d) higher the lower the interest rate (or lower the higher the interest rate)arrow_forwardSuppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year? e) What money supply should the Fed set next year if it wants to keep the price level stable? 1) What money supply should the Fed set next year if it wants the inflation rate to be 8 percent?arrow_forwardSuppose that while demand for money still depends on Y as specified, it is now no longer affected by the interest rate.arrow_forward
- The income elasticity of money demand is ny = 0.7 and the interest rate elasticity of money demand is n₁ = -0.06. Suppose that the central bank increases the money supply by 2.6%, real income increases by 2% and inflation is 3%. What is the percentage increase in the nominal interest rate? -0.3 (or -30%) 0.3 (or 30%) -0.1 (or -10%) 0.1 (or 10%)arrow_forwardConsider the following scenario: a. In Argentina, the central bank needs to determine by how much to increase the money supply next year. Suppose they estimate an increase in the overall economic activity (real GDP) of 2.5% percent and have a target inflation rate of 4%. The velocity of money has been observed to be constant over the past many years. By what level should the central bank change the money supply to achieve its inflation target? b. Next year, the central bank of Argentina wishes to reduce inflation to 2 percent, and estimates an increase in real GDP by 1.5 percent. What should be the change in the money supply? c. What is an "inflation tax", and how might it explain the creation of inflation by a central bank?arrow_forwardConsider the following equations describing real money demand: M/P=Y(2-0.5i) So, if output (Y) in the economy is 820 million USD, National bank decide to print (M) 200 million USD and price level (P) is 5, what is equilibrium level of interest rate in the economy?arrow_forward
- QUESTION THREE Assuming a constant velocity of money while the money supply is growing 10% per year, real GDP is growing at 4% per year, and the real interest rate is r = 8%. Assume that actual Inflation is equal to expected inflation. a) Find the value of the nominal interest rate in this economy b) If the central bank increases the money growth rate by 4% per year, find the change in the nominal interest rate Ai C) Suppose the growth rate of Y falls to 2% per year. What will happen to inflation? What must the central bank do if it wishes to keep inflation constant?arrow_forwardAssuming the growth rate in the velocity of money is 5$. If real GDP grows by 10% this year, and if the money supply does not change this year, how much does the price level change by? a) -5 b)-10 c) 5 d) 10arrow_forwardAn economy has the following money demand function. 0.5 Y where the nominal interest rate is in percentage points. Nominal interest rate is 9 percent. (M/P) d = Suppose the announcement of a new head of the central bank, with a reputation of begin hard on inflation, decreases expected inflation rate by 8 percentage points. What is the new velocity of money? QUESTION 14 If, in the aftermath of the announcement, both the economy's output and the current money supply are unchanged, what happens to the price level? O 1.67 2.67 3.67 O 4.67arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
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
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning