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QUESTION 3 |
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Explain the quantity theory of money. |
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Suppose the money supply is USD 400, real output is 2,000 units and the price per output is USD 100. |
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Calculate the value of velocity |
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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. |
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- Question 3 (a) What are the functions of money? (b) There were three tools discussed in this session that are used by central banks to affect the money supply. However, not all central bank uses all three. Find out what tools are used by the central bank in your region to affect the money supplyTopic: 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?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) What are the functions of money? (b) There were three tools discussed in this session that are used by central banks to affect the money supply. However, not all central bank uses all three. Find out what tools are used by the central bank in your region to affect the money supply Question 4 Draw diagrams illustrating the impact on the demand for money, the supply of money and the equilibrium interest rate, of each of the following. Explain what is going on in the money market in each case. (a) The central bank sells securities on the open market. (b) The economy grows (GDP increases) but the central bank moves to keep interest rates constant.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…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.The banking sector experiencing bank panic when: Select one: a. Many depositors simultaneously decide to withdraw money from a bank. b. believe that discretionary monetary policy should be replaced by a fixed rule relating to the growth of the money supply. c. Many banks experiencing runs at the same time. d. None of the above. Velocity is: Select one: a. Money supply is the primary determinant of both short-run movements in nominal GDP and long-run movements in prices. b. Measured as the ratio of nominal GDP to the stock of money. C. Keynesian theories hold that many other forces besides money also affect aggregate demand. d. The rate at which money circulates through the economy.Q1) This question concerns the equation of exchange and the quantity theory of money. a) Write down the equation of exchange and define its four variables. b) Calculate what happens to nominal GDP if velocity remains constant at 10 and the central bank increases the money supply from $4000 to $6000. c) What is the initial impact of central bank’s action in the short run, if prices are sticky and the price level rises from 1 to 1.25 in response to the central bank’s monetary expansion? d) What is the final level of prices in the long run, after prices fully adjust to the central bank’s action and real output returns to its initial level? Solve correctly b ,c and d but not copy paste answer provided
- Q1) This question concerns the equation of exchange and the quantity theory of money. a) Write down the equation of exchange and define its four variables. b) Calculate what happens to nominal GDP if velocity remains constant at 10 and the central bank increases the money supply from $4000 to $6000. c) What is the initial impact of central bank’s action in the short run, if prices are sticky and the price level rises from 1 to 1.25 in response to the central bank’s monetary expansion? d) What is the final level of prices in the long run, after prices fully adjust to the central bank’s action and real output returns to its initial level? Solve correctly c and d early.Q1) This question concerns the equation of exchange and the quantity theory of money. a) Write down the equation of exchange and define its four variables. b) Calculate what happens to nominal GDP if velocity remains constant at 10 and the central bank increases the money supply from $4000 to $6000. c) What is the initial impact of central bank’s action in the short run, if prices are sticky and the price level rises from 1 to 1.25 in response to the central bank’s monetary expansion? d) What is the final level of prices in the long run, after prices fully adjust to the central bank’s action and real output returns to its initial level? Solve all parts but not copy paste answer provides nowQ1) This question concerns the equation of exchange and the quantity theory of money. a) Write down the equation of exchange and define its four variables. b) Calculate what happens to nominal GDP if velocity remains constant at 10 and the central bank increases the money supply from $4000 to $6000. c) What is the initial impact of central bank’s action in the short run, if prices are sticky and the price level rises from 1 to 1.25 in response to the central bank’s monetary expansion? d) What is the final level of prices in the long run, after prices fully adjust to the central bank’s action and real output returns to its initial level? Solve correctly subparts a, b and c early.
