quanda30 - Chapter 30 1. Use the quantity equation for this...

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Practice Questions to accompany Mankiw & Taylor: Economics 1 Chapter 30 1. Use the quantity equation for this problem. Suppose the money supply is €200, real output is 1,000 units, and the price per unit of output is €1. a. What is the value of velocity? Answer: (1,000 x €1)/€200 = 5 b. If velocity is fixed at the value you solved for in part (a), what does the quantity theory of money suggest will happen if the money supply is increased to €400? Answer: €400 x 5 = €2 x 1,000, prices will double from €1 to €2 c. Is your answer in part (b) consistent with the classical dichotomy? Explain. Answer: Yes. The classical dichotomy divides economic variables into real and nominal. Money affects nominal variables proportionately and has no impact on real variables. In part (b), prices double, but real output remains constant. d. Suppose that when the money supply is doubled from €200 to €400, real output grows a small amount (say 2 per cent). Now what will happen to prices? Do prices more than double, less than double, or
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This note was uploaded on 07/06/2009 for the course BUS BAM303 taught by Professor Na during the Spring '09 term at 東京大学.

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quanda30 - Chapter 30 1. Use the quantity equation for this...

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