An economy has the following money demand function.0.5 Ywhere 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, decreasesexpected inflation rate by 8 percentage points. What is the new velocity of money?QUESTION 14If, 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 1.672.673.67O 4.67

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Answered: An economy has the following money…

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter15: The Debate Over Monetary And Fiscal Policy

Section: Chapter Questions

Problem 2TY

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Suppose the money demand function is = 1000 + 0.2Y - 1000 (r + πe). Required (a.) Calculate velocity if Y = 2000, r = 0.06, and πe = 0.04. (b.) If the money supply (Ms) is 2600, what is the price level? (c.) Now suppose the real interest rate rises to 0.11, but Y and Ms are unchanged. What happens to velocity and the price level? (d.) For part (c.), if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?
If natural unemployment rate is 5%, nominal interest rate is 7%, inflation is constant at 3%. The central bank adopts an expansionary monetary policy to reduce unemployment rate to 3%. According to EAPC with adaptive inflation, if the inflation rises to 6%, the likely long run outcome of this policy would be a. Real interest rate 3%, natural unemployment rate 3% b. Nominal interest rate 10%, natural unemployment rate 5% c. Nominal interest rate 9%, natural unemployment rate 3% d. Real interest rate 1%, natural unemployment rate 5%
2.1 Money demand in an economy in which no interest is paid on money is Md/P =1000 + 0.4Y- 100i (a) Given that P = 100, Y = 1000, and i = 0.10. Find real money demand, nominal money demand, and velocity.(6)(b)The price level doubles from P =100 to P = 200. Find real money demand, nominal money demand, and velocity.( c) Starting from the variables given in part (a) and assuming that the money demand function as written holds, determine how velocity is affected by an increase in real income, (ii) an increase in the nominal interest rate, (iii) an increase in the price level.
The economy of Macro Island is described by the quantity equation with constant velocity. All residents of Macro Island understand the quantity theory and use it to form their expectations of inflation. Real income grows at a steady 2 percent per year, and the nominal interest rate is 5 percent. In one year, people had expected the money supply to grow by 4 percent, but in fact it grew by only 3 percent. a. What was the inflation rate? (3% 4% 1% 2%) b. What was the expected inflation rate? (1% 4% 3% 2%) c. What was the ex ante real interest rate? (4% 2% 1% 3%) d. What was the ex post real interest rate? (2% 1% 4% 3%) e. Did the deviation of inflation from what was expected hurt creditors or debtors? ( Creditors Debtors)
An economy is at full employment. The quantity of money is growing at 8.3 percent a year, the nominal interest rate is 9.5 percent a year, real GDP is growing at 5.0 percent a year, and the inflation rate is 3.1 percent a year. What is the change in the velocity of circulation? Why might it be changing? The velocity of circulation is _______. A. increasing by 3.1 percent a year B. decreasing by 0.2 percent a year C. increasing by 0.2 percent a year D. constant
The demand for real money balances is given by , where M is the quantity of money, P is the price level, Y is output, and i is the nominal interest rate which is measured in percent. At the beginning of the year, the nominal interest rate is 5%. Over the year, the monetary base increases by 4%, the money multiplier increases by 2%, the output increases by 1% percent, and the nominal interest rate decreases by 10 BASIS POINTS. (a) If the ex ante real interest rate equals 0.5%, find the expected inflation rate at the beginning of the year. (b) Calculate the percentage change in the velocity of money. (c) [In answering this question, you are allowed to use the approximations regarding percentage changes; see page 4 of the math review (slide set 3).] Calculate the actual inflation rate. (d) Is it true that purchasing power was transferred from lenders to borrowers?
consider an economy in which the demand for money is of the formY / (1 + it)for t = 0, 1, 2, · · · , where output is 150 and it denotes the nominal interest rate in period t. The real interest rate, denoted r, is constant and equal to 4%. In period0 and 1, the money supply is 100 and people expect that money supply wouldbe 100 forever. People have rational expectations. In period 2, the central banksurprises people and sets the money supply will grow at 2 percent forever, that is,M0 = 100, M1 = 100, M2 = (1.02)M1, M3 = (1.02)M2, and so on. A. Find the inflation rate, nominal interest rate, real money balance in period 1,and expected inflation in period 2, given the information available in period1, π1, i1, M1/P1 and, E1π2. B. Find the inflation rate, nominal interest rate, real money balance in period 2, and expected inflation in period 3, given the information available in period2, π2, i2, M2 / P2 and, E2π3. C. Find the inflation rate, nominal interest rate, and real money…
Time Period nominal interest rate percent Expected Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate Actual Real Interest Rate Before increase in MS 10 2 2 Immediately after increase in MS 10 2 5 Suppose the nominal interest rate on savings accounts is 10% per year, and both actual and expected inflation are equal to 2%. The unanticipated change in inflation arbitrarily harms ______________. Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will ______________ to per year.
In an economy, the money supply growth rate is 5.0%, the equilibrium real interest rate is 1.5%, the potential growth rate is 4.0%, the economic growth rate is 1.0%, the inflation rate is 3.0%, the unemployment rate is 4.5%, and the rate of increase in the circulation speed is -2%. In this case, in an economy that pursues an inflation target of 2.0%, what is the appropriate interest rate target based on Taylor's rule? (Omit the unit and answer with the first decimal place.)
Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. What is the long-term expected real interest rate? How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?
E4 Assume the real money demand of an economy is:(Md/P) = 2×Yb(r + πe)-awhere 0 < b < 1 and 0 < a < 1.a) Use the real money demand above to determine the velocity of money.b) Does the quantity theory of money hold in this economy? Explain.c) Show with calculus how the velocity of money reacts to a change in output and a changein the nominal interest rate.d) Find the income and the nominal interest rate elasticities of money demand.
Money demand equation for a country is given by the equation (MP)d=e−λ(πe+r)+αY where πe is expected inflation, r is the real interest rate and Y is income. We assume that expected inflation equals actual inflation and also r and Y are considered as constant. Find the optimal level of inflation (π∗)which maximizes seigniorage revenue (S) ?

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