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MiniExam4_Key

# MiniExam4_Key - Econ 304 Mini Exam 4 Spring 2008 Name_Key...

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Econ 304, Mini Exam 4 Spring 2008 Name: ______ Key ____________________ Section: ___ Recitation Leader: ________ Open –Ended Questions 1. (10 points) Suppose real money demand is ܮ ൌ 0.8ܻ െ 1000ሺݎ൅ߨ ሻ. If the nominal money supply is 7000, real output is 1000, the real interest rate is .06, and the expect inflation rate is .04, then the price level is ___ 10 ___? Velocity is ____ 10/7 ____? (You may leave it as a fraction.) L=.8(1000)-1000(.04+.06)=800-1000(.1)=800-100=700. The equilibrium condition is L=M/P, so we have P=M/L=7000/700= 10 . We know that MV=PY, so V=PY/M=10(1000)/7000=10,000/7000= 10/7. Grading: We were looking for your demonstration that you understand the equilibrium condition in the asset market and the equation for velocity. Algebraic errors were not deducted points. Each part was worth 5 points. If you got the answer wrong, but showed work, you received partial credit. 2. (10 points) Assume that velocity is constant at 4, real output is 10, and the price level is 2. From this initial situation, the government increases the nominal money supply to 6. If velocity and output remain unchanged, by how much will the price level change? (Hint: There are two steps to this problem.) We first must calculate M. We know that MV=PY, so M=PY/V=2(10)/4=20/4=5. We want to know % P, so we need to use the equation % M + % V = % P + % Y. We know that % V=0 and % Y=0. We can calculate % M=(M2-M1)/M1=(6-5)/6=1/6. Therefore % P=1/6. (If you used the midpoint equation, you should have %

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MiniExam4_Key - Econ 304 Mini Exam 4 Spring 2008 Name_Key...

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