Bundle: Essentials Of Economics, Loose-leaf Version, 8th + Lms Integrated Mindtap Economics, 1 Term (6 Months) Printed Access Card
8th Edition
ISBN: 9781337368087
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 22, Problem 3QR
To determine
Nominal and real variables.
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What’s the difference between Nominal and Real variables in monetary policy?
There is a relationship between the quantity of money in an economy and the level of prices of goods and services. A well known theory has explained this important relationship logically. Explain that theory to elaborate the philosophy of this relationship in a meaningful way. The base for your discussion should be the Fisher’s equation of exchange. Furthermore, state the convincing reasons/criticisms due to which this quantity theory of money is considered as a weak theory and has no close concern with the real life situation.
According to the Quantity theory of Money, MV=PT, the two sides of the equation
Is mostly correct because of people's incentives
Is never correct because of trade-offs
Some times needs to be brought into equality by government policy
always balance because total value of sales is the same as the amount of money paid for them
O
Chapter 22 Solutions
Bundle: Essentials Of Economics, Loose-leaf Version, 8th + Lms Integrated Mindtap Economics, 1 Term (6 Months) Printed Access Card
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- In 1966, Milton Friedman wrote, as he often did, some memorable lines that have entered the lexicon of economic quotables. As Friedman correctly put it in a book chapter titled “What Price Guideposts?”: “Inflation is always and everywhere a monetary phenomenon, resulting from and accompanied by a rise in the quantity of money relative to output…. It follows that the only effective way to stop inflation is to restrain the rate of growth of the quantity of money.” While true, Friedman’s classic statement doesn’t tell us anything about what drives the growth of the money supply that fuels inflation. Hyperinflations are rather rare. The first hyperinflation occurred in France, where the mandate collapsed. In August 1796, France’s monthly inflation rate peaked at 304%. Almost half of the 58 recorded hyperinflations occurred in the 1990's and were the result of the funding deficiencies associated with the new post-communist states. Today, there is only one hyperinflation, Venezuela’s. Post…arrow_forwardUse the monetary approach to answer each of the following. Be sure to spell out your assumptions clearly and explain all changes in all variables. Show what will happen in money-market and spot-FX-market graphs. a. The effect on e ($/pound) if Congress reduces taxes (ceteris paribus, i.e., all else remaining the same). b. The effect on the BOP (aka ORTB) under a fixed e if the Fed engages in a contractionary Monetary Policy, MP (cet. par.). What is meant by “sterilization” in this context?arrow_forwardSuppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that the minimum wage increases to $15 in the United States, which affects the entire labor market and increases the cost of production. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants to keep prices in the economy as low as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."arrow_forward
- What does the phrase “inflation is always and everywhere a monetary phenomenon” mean? Printing more money is the main cause of deflation in the economy. Printing less money is the main cause of higher inflation rates in the economy. Increasing the money supply is the main cause of higher inflation rates in the economy. Printing more money is the main cause of a higher standard of living because everyone gets more money to spend so inflation doesn’t matter.arrow_forwardThe three main influences of money demand (MD; i.e., shift factors) include all of the following EXCEPT: O The price level O Real GDP O The nominal interest rate O Financial technologyarrow_forwardA country has 4 million units of goods and services within itself. While these goods and services remain constant, the government printed money and increased the amount of money in circulation from 10 million units to 12 million units. Under these conditions: a) Calculate the amount of increase in prices. b) Calculate the rate of decrease in the purchasing power of moneyarrow_forward
- In the money market when the money supply is increased, the interest rate falls by ________ when the interaction of the money market with the goods market is taken into account. a)a smaller extent b)All of the other three choices are possible. c)the same extent d)a greater extentarrow_forwardIf you deposit money in the bank for one year scenario 1: nominal interest rate = 10%, inflation rate = 0%  Scenario 2: normal interest rate = 25%, inflation rate = 15% In which scenario does the real value of the deposit grow the most? Explain.arrow_forwardDistinguish between the general inflation rate and the average inflation rate for specific goods?arrow_forward
- In a hypothetical economy, people have the tendency to keep 20 percent of the real income in the form of cash. The country produces only one commodity i.e. Commodity Z. The price of Commodity Z is Rs.50 per unit. 200 units of Commodity Z are produced in the economy. Under cash balance approach, the demand for money is a. Rs.2000 b. Rs.10000 c. Rs.40 d. Rs.200arrow_forwarddiscuss the scope and importance of monetary economics to the feild of economicsarrow_forwardWhy does inflation have a positive effect on the nominal interest rate?arrow_forward
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