10SQ9 (take home)

10SQ9 (take home) - Quantecon is a country in which the...

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Econ. 1A. Quiz 9.  Name _________________________.  ID.___________________________. Due: in the beginning of Monday’s class (May 3, 2010). In the last two sections of chapter 8, we learn that 1. In the short run, the quantity of money and RGDP are given, and nominal interest rate (i) adjusts to achieve equilibrium. 2. In the long-run, demand and supply, i.e., DLF and SLF, in the loanable funds market determines the real interest (r) and the nominal interest rate (i) equals the equilibrium real interest rate (r) plus the expected inflation rate e ). RGDP, which influences the demand for money (MD) , equals potential GDP. So the price level (p) adjusts to make the quantity of real money supplied equal to quantity demanded. Please read the text and study plain carefully and answer the following question:
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Unformatted text preview: Quantecon is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology. In year 1, Y 1 (RGDP) = $200 million, P 1 (price level) = 100, V (velocity of circulation) = 10. In year 2, the quantity of money was 20% higher than in year 1, i.e. M 2 = M 1 (1+0.2). a. Explain carefully what is the quantity theory of money? [3] b. What is the equation of exchange? Write down this equation.[2] c. The quantity of money in year 1 (M 1 ) and year 2 (M 2 ). Show you calculation explicitly.[3] d. The price level in year 2 (P 2 ) and inflation rate. . Show your answer graphically. [2] e. Y 2 ( level of RGDP in year 2) and the velocity of circulation in year 2. [2]...
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