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 െ 1000ሺݎߨ
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)=8001000(.1)=800100=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=(M2M1)/M1=(65)/6=1/6.
Therefore
%
∆
P=1/6.
(If you used the midpoint equation, you should have %
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 Fall '07
 STONE,MISTYRIANO,ALEJANDRO
 Macroeconomics, Inflation, Interest Rates, Fed

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