Suppose the central bank subscribes to a monetarist approach to monetary policy. The central bank believes that the velocity of money grows at a predictable rate of 2% per year and that potential real GDP grows at 4% per year. If the central bank observes a monetary policy rule that stipulates money supply growth of 5% per year, it will expect an inflation rate of 11% Y per year and nominal GDP growth of 7% Y per year.
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- Assume an economy’s annual money velocity in circulation is 10. Please answer the following question in the view of monetarists (i.e., the neoclassical view): “If the annual economic growth rate is 5%, what should be the money supply increasing rate to maintain a low inflation rate as 2%?”Assume an economy’s annual money velocity in circulation is 10. Please answer the following two question: In the view of monetarists (i.e. neoclassical view), if the annual economic growth rate is 6%, what should be the money supply increasing rate to maintain a low inflation rate as 3%? Please show equation.Suppose that the real money demand function is L(Y,r+πe)=0.3Y÷ (r+πe) Where Y is real output, r is the real interest rate, and πe is the expected rate of inflation. Real output is constant over time at Y = 1500. The real interest rate is fixed in the goods market at r = 0.5 per year. Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist for ever. Currently, the nominal money supply is M = 400. What are the values of the real money supply and the current price level? (Hint: What is the value of the expected inflation rate that enters the money demand function?). Suppose that the nominal money supply is M = 400. The Bank of Namibia announces that from now on the nominal money supply will grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of real money supply and the current price level? Explain the effects on the…
- An added benefit of inflation is that it allows for the possibility of a. menu costs. b. aggregate supply shocks. c. negative real interest rates. d.recessions.With respect to the concept of inflation, it is correct to say that ________. options: A) inflation increases the purchasing power of consumer dollars. B) inflation and deflation are really almost synonymous in practice. C) the consumer price index is one way to measure inflation. D) inflation occurs when the amount of money taken out of the economy exceeds the amount of money put into the economy. E) inflation occurs when people have more money to spend as the quantity of goods available increases.Recently the economic conditions of the country have been weakened. Even though inflation has not increased in the last year. Price of crude oil on the international market has increased by 15% last month. As a measure in controlling inflation in the country, the Monetary Policy Committee (MPC) of the Bank of Ghana has decided to restrict the supply of money and increase the target policy rate by 100 basis points (1%) Required:a. As a finance student, do you support the decision made by the monetary committee? Explain (not exceeding 6 lines of explanation).b. Explain how prices of debt securities would change in response to this policy? (not exceeding 6 lines of explanation) c. Assume the Monetary Policy Committee decides to reduce the target policy rate by 1.5% today and this decision is not backed by any financial market expectations. Will this change in policy directive affect yields paid by firms when they issue corporate bonds? Explain your answer.d. In the last month, the 91day…