304L Homework 6 - circumstances the product of two growth...

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Economics 304L: Principles of Macroeconomics Spring 2010 Sadler Homework 6 1. Note that the “gross” growth rate for some variable like real GDP, Y , can be written as ೟షభ ൌ1൅ ݃ , where ݃ is the “net” growth rate (for example, 3 percent per year, so the gross growth rate would be 1.03). Let the equation of exchange (or “quantity equation”) for year t as ܯ ܸ ൌܲ ܻ . a. Noting that in the previous year the equation of exchange can be written as M ୲ିଵ V ୲ିଵ ൌP ୲ିଵ Y ୲ିଵ , write the quantity equation in terms of the growth rates of the four variables and show that the approximate final answer is g m ൅g v ൌπ൅g y . Hint: for any economy under normal
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Unformatted text preview: circumstances, the product of two growth rates, such as g m g v is approximately zero . For example, assume that g m ൌ .05 and g v ൌ .02 , then g m g v ൌ ሺ. 05ሻሺ. 02ሻ ൌ .001 , which is very close to zero, so we will assume that it is exactly zero. b. Imposing the assumptions of the quantity theory onto the equation, demonstrate Milton Friedman’s dictum that “Inflation is always and everywhere a monetary phenomenon.” The following problems refer to the “Problems and Applications” section at the end of Chapter 17 of Mankiw (pp. 382 ‐ 383). 2. No. 1 3. No. 2 4. No. 6 5. No. 7 6. No. 10...
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