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Economics 302 Spring 2005 Answers to Practice Questions 3 Multiple Choice Questions: 1. b 2. c 3. c 4. d 5. f 6. b 7. d 8. a 9. b 10. c 11. e 12. d 13. b 14. d Problems: 1. Use the information in the table below to answer this question. a. Year Money Supply (M) Velocity (V) Price Level (P) Real GDP (Y) 1998 100 2 1 200 1999 105 2.02 1.05 202 2000 110 2.03 1.08 206.76 2001 112 2 1.05 213.33 b. Year % Change in M % Change in V % Change in P % Change in Y 1998-1999 5 1 5 1 1999-2000 4.76 .5 2.86 2.36 2000-2001 1.82 -2.78 -2.78 3.18 c. Yes, it is a good approximation. We can see this looking at the table below. Year % Change in M + % Change in V % Change in P + % Change in Y Difference between column 2 and column 3 1998-1999 6 6 0 1999-2000 5.25 5.22 .03 2000-2001 .34 .4 .06

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d. No the approximation is for % change in M + % change in V = % change in P + %change in Y while the % change in real GDP is just given by the figures in the column labeled “% change in Y”. 2. The question uses the Fisher Equation. a. Use the Fisher Equation to complete the following table. Real Interest Rate (%) Nominal Interest Rate (%) Inflation Rate (%) 3 5 2 1 5 4 -1 5 6 4 6 2 -2 8 10 3 9 6 -1 3 4 b. Use this information to complete the following table.
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