B06-Tutorial2

Principles of Macroeconomics (with Xtra!)

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Page 1 of 1 T HE U NIVERSITY OF T ORONTO AT S CARBOROUGH Division of Management ECM B06H – Macroeconomic Theory and Policy: A Mathematical Approach TUTORIAL #2 Q1. Consider an economy is such that real output is growing at 5% each year, the real interest rate is constant at 4%, and the money supply is growing at 5% each year. The demand for money is given by: ( M d /P ) = k @ Y ( Suppose ( =1 , and k = 1/V = a constant (where V is the income velocity of money). a) Calculate the rate of inflation and the nominal interest rate. b) Calculate the effect on the price level and the rate of inflation if the rate of growth of the money supply changes to 10% each year. Represent your answer in a graph (with horizontal axis=time). c) Calculate the effect on the price level and the rate of inflation if the rate of growth of output changes to 3%. d) Algebraically solve for the Aggregate Demand (AD) curve. Demonstrate that it is downward sloping in Y and what its shift factors are and their sign. [Hint: The AD
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