MACROECONOMICS (LOOSELEAF)-PACKAGE
13th Edition
ISBN: 9781337492317
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 15, Problem 1DQ
To determine
To explain: The reason for velocity being high when the interest rates are higher.
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Use the concept of opportunity cost to explain why velocity is higher at higher interest rates?
Provide the equation for the velocity of money in terms of Price level (P), output (Y), and the amount of money in the economy (M)
a) Explain what will happen to velocity if P increases and why.
b) Explain what will happen to velocity if Y increases and why.
c) Explain what will happen to velocity if M increases and why.
Critically analyze what facts determine the impact of an interest rate change? How effective is monetary policy?
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Similar questions
- It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. If we assume that velocity is constant, does this zero-inflation goal require that the rate of money growth equal zero? If yes, explain why. If no, explain what the rate of money growth should equalarrow_forwardConsider the behavior of long-term rates and short-term rates. Why do they behave differently?arrow_forward“If nominal GDP rises, velocity must rise.” Is this statement true, false, or uncertain? Explain your answer.arrow_forward
- Define velocity of money and discuss the major determinants of velocity.arrow_forwardIf the Fed lowers interest rates, that is an example ofarrow_forwardVelocity of Money in the United States. Using the Federal Reserve Bank of St. Louis Web site (www. research.stlouisfed.org/fred2), calculate the velocity of M1 and M2 in 1960 and 2000. How have they changed?arrow_forward
- What is the effect on velocity if Congress outlaws the use of credit cards?arrow_forwarda) Identify the four major tools of monetary policy. b) How can monetary policy address the problem of inflation?arrow_forwardWhat direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?arrow_forward
- Changes to both the money supply and the velocity of money include changes in aggregate demand. However, the long-run impacts of changes in these variables are different. How are the effects of an increase in the velocity of money and the effects of an increase in the money supply different?arrow_forwardWhy are interest rates now increasing (in subject to monetary policy)? Prove explanations in detail with an examplearrow_forwardUsing the book of Godley, Wynne, and Marc Lavoie. 2012. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. 2nd ed. 2012 edition., Simulate a scenario of the deterministic version of the model where the interest rate increases by one percentage point. What is the effect of the increase in the interest rate? Discuss using the below plots.arrow_forward
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