Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Chapter 28, Problem 40P
All other things being equal, by how much will nominal
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All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $110 billion, and the velocity of money is 3.2? (Enter your answer in billions of dollars. That is, if you find an expansion of 1 billion enter 1 for your answer.)
Question 13 (1 point)
Suppose the supply of money, measured by M1, is $3.0 trillion, output, measured by real GDP, is
$18.7 trillion, and the velocity of money is 7.1. Suppose the supply of money increases to $3.7
trillion but GDP and the velocity of money do not change. What is the percent by which prices
change? Provide your answer as a percentage rounded to two decimal places. Do not include
any symbols, such as "$," "," "%," or "," in your answer.
Your Answer:
Answer
Suppose 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?
Chapter 28 Solutions
Principles of Economics 2e
Ch. 28 - Why is it important for the members of the Board...Ch. 28 - Given the danger of bank runs, why do banks not...Ch. 28 - Bank runs are often described as self-fulfilling...Ch. 28 - If the central bank sells 500 in bonds to a bank...Ch. 28 - What would be the effect of increasing the banks...Ch. 28 - Why does contractionary monetary policy cause...Ch. 28 - Why does expansionary monetary policy causes...Ch. 28 - Why might banks want to hold excess reserves in...Ch. 28 - Why might the velocity of money change...Ch. 28 - How is a central bank different from a typical...
Ch. 28 - List the three traditional tools that a central...Ch. 28 - How is bank regulation linked to the conduct of...Ch. 28 - What is a bank run?Ch. 28 - In a program of deposit insurance as it is...Ch. 28 - In government programs of bank supervision, what...Ch. 28 - What is the lender of last resort?Ch. 28 - Name and briefly describe the responsibilities of...Ch. 28 - Explain how to use an open market operation to...Ch. 28 - Explain how to use the reserve requirement to...Ch. 28 - Explain how to use the discount rate to expand the...Ch. 28 - How do the expansionary and contractionary...Ch. 28 - How do tight and loose monetary policy affect...Ch. 28 - How do expansionary, tight, contractionary, and...Ch. 28 - Which kind of monetary policy would you expect in...Ch. 28 - Explain how to use quantitative easing to...Ch. 28 - Which kind of monetary policy would you expect in...Ch. 28 - How might each of the following factors complicate...Ch. 28 - Define the velocity of the moneyCh. 28 - What is the basic quantity equation of money?Ch. 28 - How does a monetary policy of inflation target...Ch. 28 - Why do presidents typically reappoint Chairs of...Ch. 28 - In what ways might monetary policy be superior to...Ch. 28 - The term moral hazard describes increases in risky...Ch. 28 - Explain what would happen if banks were notified...Ch. 28 - A well-known economic model called the Phillips...Ch. 28 - How does rule-based monetary policy differ from...Ch. 28 - Is it preferable for central banks to primarily...Ch. 28 - Suppose the Fed conducts an open market purchase...Ch. 28 - Suppose the Fed conducts an open market sale by...Ch. 28 - All other things being equal, by how much will...Ch. 28 - Suppose now that economists expect the velocity of...Ch. 28 - If GDP is 1,500 and the money supply is 400, what...Ch. 28 - If GDP now rises to 1,600, but the money supply...Ch. 28 - If GDP now falls back to 1,500 and the money...
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- 2. Suppose that in the U.S., the income velocity of money (V) is constant. Suppose, too, that every year, real GDP grows by 2.5 percent (%ΔY/year = 0.025) and the supply of money grows by 10 percent (%ΔM/year = 0.10). a. According to the Quantity Theory of Money, what would be the growth rate of nominal GDP = P×Y? Hint: %Δ(X×Y) %ΔX + %ΔY.arrow_forwardSuppose that banks are required to hold reserves equal to at least 4 per cent of their deposits and hold no excess reserves. Also suppose that desired holdings of currency by the non-bank public are 3 per cent of deposits. The total money supply is $450m. From this information calculate the following. (Note: enter numerical values only. No words or symbols) The simple deposit multiplier (to one decimal place) The money multiplier (to one decimal place) The monetary base ($m to one decimal place) $arrow_forwardAll other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3?arrow_forward
- D7 Suppose that people hold 17 cents out of every dollar of deposits as currency. Suppose that banks hold 13 cents out of every dollar of deposits as excess reserves. If the Fed buys $100 billion worth of Treasury securities on the open market, what is the change in the money supply? Make sure to express your answers in billions. Make sure to round your answers to the nearest 100th decimal points. For example, 24.56 for $24.56 billion.arrow_forwardGive typing answer with explanation and conclusion A standard "money demand" function used by macroeconomists has the form ln(m)=β0+β1ln(GDP)+β2R, Where m is the quantity of (real) money, GDP is the value of (real) gross domesticproduct, and R is the value of the nominal interest rate measured in percent per year. Supposed that β1 = 2.66 and β2 = −0.05. A) What is the expected change in m if GDP increases by 4%? The value of m is expected to_________(increase or decrease ) by approximately ________% (Round your response to the nearest integer) B) What is projected to change in m if the interest rate increases form 2% to 6% ? The value of m is expected to ________(increase/decrease) by approximately ________% (Round your response to the nearest integer)arrow_forwardQuestion 8 Suppose that banks are required to hold reserves equal to at least 4 per cent of their deposits and hold no excess reserves. Also suppose that desired holdings of currency by the non-bank public are 3 per cent of deposits. The total money supply is $450m. From this information calculate the following. [Note: enter numerical values only. No words or symbols] The simple deposit multiplier (to one decimal place) The money multiplier (to one decimal place) The monetary base ($m to one decimal place) $ m If the central bank supplies an additional $4m of bank reserves, what will be the effect on the total money supply? ($m to one decimal place) $ marrow_forward
- 60) Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion. Suppose the Federal Reserve increases the money supply to $850 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $850 billion of the money supply. What causes households and firms to want to hold the additional $50 billion of the money supply? 61) Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases. 1arrow_forward4. Suppose the central bank of Oman needs to boost the economy by rising the money supply. It is calculated by the bankers and researchers that the velocity of money is 3, and the price level increases from 100 to 120 due to such boost. By applying the quantity equation of money, what would be the effect of a rise in the money supply of 200 billion Omani Riyals on quantity of goods and services in the Oman's economy with a starting money supply of 800 billion.arrow_forward1. Suppose velocity is 3, real output is 9000, and the price level is 1.5. What is the level of real money balances in this economy? 2. Considered the following data for an economy. Currency in circulation held by the public: CU = 400 dollars; Monetary Base: B = 800 dollars; currency/deposit ratio: cu = 0.25. What is the value of reserves in this economy? 3. Considered the following data for an economy. Currency in circulation held by the public: CU = 400 dollars; Monetary Base: B = 800 dollars; currency/deposit ratio: cu = 0.25. What is the value of the money multiplier in this economy? Please answer the three questions above (and highlight the answer if you can). Please explain the math/reasoning usedarrow_forward
- Suppose that the central bank wants to stimulate the economy by increasing the money supply. The bankers estimate that the velocity of money is 2.8, and that the price level will increase from 130 to 150 due to the stimulus. Using the quantity equation of money, what will be the impact of an $800 billion dollar increase in the money supply on the quantity of goods(In billions) and services in the economy given an initial money supply of $4 trillion?(Please round your answer to include 2 decimal places.)arrow_forward3. Describe functions of a central bank and the policy tools used by central banks to control the quantity of moneyarrow_forward10. Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. If the Fed does nothing, the money supply will tend to bonds in open-market But the Fed can hold the money supply constant by operations. a. increase, buying b. increase, selling c. decrease, buying d. decrease, selling 11. Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely? a. a rise in stock prices b. a rise in building permits c. a decline in initial claims for unemployment insurance d. a decline in the slope of the yield curve 12. Stagflation-lower output and higher prices-is caused by a. an expansion in aggregate demand. b. a contraction in aggregate demand. c. a favorable shock to aggregate supply. d. an adverse shock to aggregate supply.arrow_forward
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