56. Modern Monetary Theory (MMT) rejects which of the following assumptions of classical economics when it comes to the quantity equation? (A) Monetary neutrality. (B) Liquidity preferences. (C) The Cantillion effect. (D) Velocity is stable over time.

56. Modern Monetary Theory (MMT) rejects which of the following assumptions of classical economics when it comes to the quantity equation? (A) Monetary neutrality. (B) Liquidity preferences. (C) The Cantillion effect. (D) Velocity is stable over time.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter28: Monetary Policy And Bank Regulation

Section: Chapter Questions

Problem 35CTQ: A well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective...

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A well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective chapter) describes the short run tradeoff typically observed between inflation and unemployment. Based on the discussion of expansionary and contractionary monetary policy, explain why one of these variables usually falls when the other rises.
3b. Suppose a country has a money demand function (M/P)d kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?
part-a: What is the relationship between the price level in a country and the value of money in that country? part-b: What is the impact of an expansionary monetary policy (such as a central bank lowering required reserve ratios) on the inflation rate and the value of money? What is the impact of a contractionary monetary policy (such as a central bank increasing required reserve ratios) on the inflation rate and the value of money? part-c: What is the classical dichotomy of nominal and real variables? How is the classical dichotomy related to the neutrality of money? part-d: Why is inflation referred to as a tax on holding money? part-a: What is the relationship between the price level in a country and the value of money in that country? part-b: What is the impact of an expansionary monetary policy (such as a central bank lowering required reserve ratios) on the inflation rate and the value of money? What is the impact of a contractionary monetary policy (such as a…
2. Inflation can cause increased wealth inequality through the Cantillion Effect. Es-sentially, this means that expansionary monetary policy benefits those who are initially given new money (usually those who are rich and well-connected), while the rest of the population suffers the effects of inflation. Using the quantity theory of money, explain why this is the case.
7 Inflation is caused as a result of increase in the money supply. increase in the money supply without a corresponding increase in production. decrease in the money supply without a corresponding decrease in production. fall in production.
part-a: Explain the quantity theory of money. How does the quantity theory of money relate to Milton Friedman’s famous statement that “Inflation is always and everywhere a monetary phenomenon?” part-b: In the “Classical Theory of Inflation”, what determines the price level and the value of money? Explain using a supply and demand plot. part-c: Now using your supply and demand plot from part-b of this question, illustrate the impact of an expansionary monetary policy on the inflation rate and the price level. For full credit, also do explain how the transition process works from the initial equilibrium to the final equilibrium. part-d: What is meant by the phrase “Money is neutral in the long run”? (in other words, what is monetary neutrality?). Explain by using the quantity equation part-e: What is the Fisher equation? What relationship does it represent?
QUESTION 3 a) Explain the quantity theory of money. b) Suppose the money supply is USD 400, real output is 2,000 units and the price per output is USD 100. i) Calculate the value of velocity ii) If the velocity is fixed at the value you solved for in part (a). what does the quantity theory of money suggest will happen if the money supply is increased to USD 4000.
ONLY QUESTION 2 The central bank of the country is concerned about the possibility that the country is going to face a high inflation rate, and it adopted a contractionary monetary policy as a result. Analyse how the central bank policy will affect the market for bonds: price, demand, and supply of bonds (hint: refer to relationship between the interest rate and the price of bonds). Using a graph of the money market, discuss how it will affect the demand for and the supply of money. Analyse the process of achieving equilibrium in the money market.
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Topic: Quantity theory of money. Answer 1, 2 and 3. What will happen to nominal GDP if, instead, the money supply decreases by 8 percent and velocity does not change? What will happen to nominal GDP if, instead, the money supply increases by 5 percent and velocity decreases by 5 percent? What happens to the price level in the short run in each of these three situations?
the money supply of Freedonia this year is $150 billion nominal GDP is $750 billion .assuming that velocity of money is stable. real GDP gross 2%this year. and money supply does not change what are the velocity, price level, and inflation rate