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# Asst08f09 - AGEC 217 Assignment 8 RWTaylor Due Name Seat No...

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AGEC 217 Assignment 8 RWTaylor Due: 10/23/09 Name __________________________ Seat No. _____________ 1. The economy’s current GDP is \$14,200, full employment GDP is \$14,600 and the MPC is . 67. Explain appropriate fiscal policy (five parts)

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2. The quantity theory of money MV = GDP = PY is used to: a. Find the money supply change needed to accomplish monetary policy goals. b. Tell us that any error in changing M will be reflected in inflation. M = Amount of money in the country V = Velocity; the number of times the money is spent annually. GDP = Nominal GDP, current value of the goods and services produced in the country in a year. P = Price level (The annual percent change in P is the inflation rate.) Y = Real GDP or the amount of items produced in the country The sum of the percent changes in M and V equals the sum of the percent changes in P and M. Because V changes little over a six month period, the length of most monetary policy analysis, the percent change in V is considered to be zero. Real output Y is not influenced by the money supply in any short period of time so that it stays the same regardless of percent change in M. Let’s practice: M * V = GDP = P * Y +6% + +0% = +6% = +2% + +4% a. If real output is expected to increase 2.2 % and inflation to be 2.8 %, how much should be the money supply be increased? M * V = GDP = P * Y +___% + +___% = +5.0% = +2.8% + +2.2% b. If real output is expected to increase 3.1 % and inflation to be 2.2 %, how much should be the money supply be increased? M * V = GDP = P * Y +___% + +___% = +___% = +___% + +___%
c. If real output is expected to increase 2.6 % and inflation to increase 3.4 %, how much should be the money supply be increased? M

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## This note was uploaded on 02/19/2011 for the course AGEC 217 taught by Professor Deboer during the Fall '08 term at Purdue.

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Asst08f09 - AGEC 217 Assignment 8 RWTaylor Due Name Seat No...

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