a)
To describe: The values of real money supply and current price level are to be determined when the money supply is growing at rate 10%.
a)
Answer to Problem 6NP
The real money supply = 10
The current price level = 30
Explanation of Solution
The equation to calculate the real money demand function −
Where,
Now, the following equation to calculate the growth of money supply −
Now, put the given values in Equ (1) −
At the condition of equilibrium, the real money demand is equal to the real money supply.
Given that,
M = 300
Now, the equation can be represented as −
Or,
Now, put the given values in Equ (2) −
The price level in the economy = 30
The equation to calculate the real money supply −
Now, put the calculated values in Equ (3) −
Introduction:
The real money supply can be defined as the nominal money supply which is adjusted for the effect of inflation.
b)
To describe: The values of real money supply and current price level are to be determined when the money supply is growing at rate 5%.
b)
Answer to Problem 6NP
The real money supply = 15
The current price level = 20
Explanation of Solution
Given that −
The money supply is growing at rate 5%.
The equation to calculate the growth of nominal supply −
The equation of the demand function is represented as −
Put the given or calculated values in the above equation −
At the condition of equilibrium, the real money demand is equal to the real money supply.
Given that −
M =300
Now, the equation can be represented as −
Or,
Now, put the values in above Equ −
The new price level in the economy = 20
The equation to calculate the real money supply −
Now, put the calculated values in Equ (3) −
The real money supply is 15.
Introduction:
The real money supply can be defined as the nominal money supply which is adjusted for the effect of inflation.
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