EBK ESSENTIALS OF ECONOMICS
7th Edition
ISBN: 8220102452107
Author: Mankiw
Publisher: CENGAGE L
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Chapter 22, Problem 1PA
Subpart (a):
To determine
Money supply, price level, and velocity.
Subpart (b):
To determine
Money supply, price level, and velocity.
Subpart (c):
To determine
Money supply, price level, and velocity.
Subpart (d):
To determine
Money supply, price level, and velocity.
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EBK ESSENTIALS OF ECONOMICS
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- Suppose that this year's money supply is $600 billion, nominal GDP is $15 trillion, and real GDP is $3 trillion. The price level is , and the velocity of money is . Suppose that velocity is constant and the economy's output of goods and services rises by 4 percent each year. Use this information to answer the questions that follow. If the Fed keeps the money supply constant, the price level will , and nominal GDP will . True or False: If the Fed wants to keep the price level stable instead, it should keep the money supply unchanged next year. True False If the Fed wants an inflation rate of 9 percent instead, it should the money supply by . (Hint: The quantity equation can be rewritten as the following percentage change formula: (Percentage Change in M)+(Percentage Change in V)=(Percentage Change in P)+(Percentage Change in Y)Percentage Change in M+Percentage Change in V=Percentage Change in P+Percentage Change in Y.)arrow_forwardSuppose that this year's money supply is $7.5 trillion, nominal GDP is $22.5 trillion, and real GDP is $15 trillion. 1. Calculate velocity of money and the price level. 2. Suppose that velocity of money is constant and the economy's output remains unchanged next year. What will happen to the price level next year if the central bank raises the money supply by 2 percent?arrow_forwardSuppose that this year's money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. The price level is 2, and the velocity of money is 20 Suppose that velocity is constant and the economy's output of goods and services rises by 4 percent each year. Use this information to answer the questions that follow. If the Fed keeps the money supply constant, the price level will fall by 4% and nominal GDP will stay the same True or False: If the Fed wants to keep the price level stable instead, it should increase the money supply by 4% next year. True False If the Fed wants an inflation rate of 11 percent instead, it should be rewritten as the following percentage change formula: the money supply by %. (Hint: The quantity equation can (Percentage Change in M) + (Percentage Change in V) = (Percentage Change in P) + (Percentage Change in Y).)arrow_forward
- Money Supply Suppose an economy is in long-run equilibrium. The central bank reduces the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium. Now adjust the graph to show the new long-run equilibrium. What causes the economy to move from its short-run equilibrium to its long-run equilibrium? 1. The government increases spending to increase aggregate demand. 2. The government increases taxes to curb aggregate demand. 3. Nominal wages, prices, and perceptions adjust upward to this new price level. 4. Nominal wages, prices, and perceptions adjust downward to this new price level. Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the decrease in the money supply? Check all that apply. 1. Nominal wages at the initial equilibrium are equal to nominal wages at the new short-run…arrow_forwardSuppose the economy is in long-run equilibrium with GDP approaching $23T and the unemployment rate is approaching 4%. Now, let's say that the Fed has decided to decrease the money supply by 6%! The Fed proposes this move by raising the Prime Rate from the current 3.25 to 4.00 and to sell a new trunk or class of 30-year Treasury Bonds. This was not expected! What might be the short and long run effects on the economy as a whole if this were to take place? What happens to the inflation rate? What happens with unemployment? Like I said, this was actually expected that the Fed might take some sort of constriction action to stave off reduce inflation and to strengthen the money supply. However, President Biden, Congress and the Treasury Department had hoped for no contraction of the money supply until 2023.arrow_forwardSuppose that this year's money supply is $500 billion, nominal GDP is $10 trillion and real GDP is $5 trillion. a. What is the price level? b. What is the velocity of money?arrow_forward
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