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?

Question

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 subparts a, b and c early. 

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Time Value of Money

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