# Handout 6 Key - So, plug in the value of Y and use the...

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Econ 3140 Fall 2009 Handout #6 with answers V=nominal GDP/nominal money stock = PY M Since V = PY M , PY=P M=P = Y M=P . From the money demand function M d P = 1000 + 0 : 2 Y 1000( r + e ) = 1000 + 0 : 2 ± (2000) 1000(0 : 06 + 0 : 04) = 1300 . So V = Y M=P , 2000 1300 ² 1 : 54 . (b) P = M s M d =P = 2600 = 1300 = 2 . (c) Now M d P = 1000+2 Y 1000 i = 1000+2 ± (200) 1000(0 : 15) = 1250 So V Y M=P , 2000 1250 = 1 : 6 , and P = M s M d =P = 2600 = 1250 = 2 : 08 . The in²ation rate would be = P 1 P 0 1 ± ± 100 = 4% . 2. (a) M d P = 2400 + 0 : 2 Y 1000( r + e ) , 10 ; 000 r = 2400 4000 2 + 0 : 2 ± (5000) 1000(0 : 03) = 2400 2000 + 1000 300 , r = 1100 10 ; 000 = 0 : 11 . (b) 5 3. (a) The price level is the ratio of nominal money supply to real money demand.
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Unformatted text preview: So, plug in the value of Y and use the market equilibrium condition to determine the price level, P = M s L = M s ( M d =P ) , 1000+0 : 10 & (1000) ± 4000 & 640+0 : 10 & (1000) ± 5000 & (0 : 02+ & e ) = 1100 ± 4000 & 640 ± 5000 & & e = 980 490 = 2 (b) P = 1100 ± 4000 & 640 ± 5000 & & e = 940 490 = 1 : 92 (c) P = 1100 ± 4000 & 640 ± 5000 & & e = 980 440 = 2 : 23 (d) P = 1100 ± 4000 & 640 ± 5000 & ( r + & e ) = 980 440 = 2 : 23 1...
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## This note was uploaded on 03/10/2010 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).

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