Practice_HW_ANSWERS - Questions for Review from Chapter 10...

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Questions for Review from Chapter 10 5. The real rate of return on money is approximately equal to minus the rate of inflation. If we define the real rate of return on money as , m r then the exact relationship is: 1 1 (1 ) m r i + = + 7. A permanent, once-and-for-all increase in the money supply has no effect on the real economy. That is, money is neutral. The only effect of the increase in the money supply is a permanent, proportionate increase in the price level. 11. Money demand can increase if incomes rise (households then want to consume more and thus need more cash, firms want to buy more investment goods and also need more cash), if the nominal interest rate is lower, as then the opportunity cost of holding money is lower, and if prices are higher, as money demand is formulated in nominal terms. Problems from Chapter 10 3. Government spending in the monetary intertemporal model. (a)The real effects of a temporary increase in government spending are the same as those in the real intertemporal model. Output and employment increase, the real interest rate increases, and the real wage decreases. The new consideration is the effect on the price level. The increase in income causes money demand to increase. The increase in the real interest rate causes the demand for money to decrease. With a fixed supply of money,
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This note was uploaded on 02/04/2011 for the course ECON 320L taught by Professor Kuruscu during the Fall '08 term at University of Texas at Austin.

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Practice_HW_ANSWERS - Questions for Review from Chapter 10...

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