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Econ 302 HW#3

# Econ 302 HW#3 - foreign country whose money the small...

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Econ 302 HW #3 Ch. 4 Qiu Jin 4. a. (M/P)d=kY Assume the country is under equilibrium, then (M/P)d=( M/P)s average inflation rate=P= %growth in M / %growth in Y = 12/4=3% b. If %growth in M stays the same, Inflation rate will decrease, because they are in an inverse relation. c. MV=PY If all other conditions stay the same, the growth in V will expand inflation. 5. Printing own money: Pros: As soon as the small country print its own money, the government of the country can receive revenue. Cos: If the government print out too much more money than is needed, there will be inflation, or even hyperinflation. Using the money of its larger neighbor: Pros: If the country is going to have any inflation, the pressure is not under the domestic government. Cos: The government loses its ability of getting revenue out of printing money which is a huge loss. Actually the choice depends largely on the stability of the home country and the

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Unformatted text preview: foreign country whose money the small country decides to use. If the foreign country is more stable than the home country, then it is safer to choose to use their money rather than print own money, vice visa . 7. a. (M/P)d=L(I,Y)=Y/(5i)=g b. 5i MV=PY so, M/P=Y/V=Y/(5i) V=5i c. g M(g)+V=P +Y 10. Increase in M leads to an increase inflation. Then nominal interest rate rises correspondingly. As a consequence, people now feel more risky of holding money. As a result, total money balance tends to fall. Since real money balance is part of wealth, real wealth also falls. Consumption will decline as well ,and, therefore, increases saving. This leads to a lower real interest rate. According to Fisher effect: i = r + π In this case, since the real interest rate r falls, the change in inflation increases the nominal interest rate i by less than the change itself....
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Econ 302 HW#3 - foreign country whose money the small...

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