{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

CC2105+(T8[1].+Ch.17)+ Ans only

CC2105+(T8[1].+Ch.17)+ Ans only - (T7.Ch.17 1...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CC2105 Introduction to Macroeconomics (T7. Ch.17) 1. In this problem, all amounts are shown in billions. a. Nominal GDP =  P  x  Y  = $10,000 and  Y  = real GDP = $5,000, so  P  = ( P  x  Y )/ Y  =  $10,000/$5,000  = 2. Since  M  x  V  =  P  x  Y , then  V  = ( P  x  Y )/ M  = $10,000/$500 = 20. b. If  M  and  V  are unchanged and  Y  rises by 5 percent, then since  M  x  V  =  P  x  Y must fall by 5 percent.  As a result, nominal GDP is unchanged. c. To keep the price level stable, the Fed must increase the money supply by 5  percent, matching the increase in real GDP.  Then, since velocity is unchanged,  the price level will be stable. d. If the Fed wants inflation to be 10 percent, it will need to increase the money  supply 15 percent.  Thus M x V will rise 15 percent, causing  P  x  Y  to rise 15  percent, with a 10 percent increase in prices and a 5 percent rise in real GDP. 2. a. If people need to hold less cash, the demand for money shifts to the left, since  there will be less money demanded at any price level. b. If the Fed does not respond to this event, the shift to the left of the demand for  money combined with no change in the supply of money leads to a decline in the  value of money (1/P), which means the price level rises, as shown in Figure 1.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Figure 1 c. If the Fed wants to keep the price level stable, it should reduce the money supply  from  S 1  to  S 2  in Figure 2.  This would cause the supply of money to shift to the  left by the same amount that the demand for money shifted, resulting in no  change in the value of money and the price level. Figure 2 3. With constant velocity, reducing the inflation rate to zero would require the money growth  rate to equal the growth rate of output, according to the quantity theory of money ( M  x  P  x  Y ). 4. Lenin is right that governments can confiscate the wealth of citizens with inflation.  Inflation acts like a tax on people who hold money, by reducing its value.  The  government can finance its expenditures by printing money and using it to buy things,  which results in a higher money supply and inflation.  The result is a transfer of wealth  from money-holders to the government. 5. If a country's inflation rate increases sharply, the inflation tax on holders of money  increases significantly.  Wealth in savings accounts is not subject to a change in the  inflation tax because the nominal interest rate will increase with the rise in inflation.  But 
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern