Hw5 - Sonoma State University Department of Economics...

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Sonoma State University ECONOMICS 304 Department of Economics Florence Bouvet Assignment 5 Due Date: October 29 th at the beginning of lecture Please turn in your answers on a separate page. 1) Suppose that in Taiwan the velocity of money is constant, real GDP grows by 6% per year each year, the money stock grows by 9% per year, and the nominal interest rate is 7%. a) Using the quantity theory of money and the Fisher relation, what should be the inflation rate and the real interest rate in Taiwan? b) Suppose the central bank of Taiwan decides to lower inflation by lowering the money supply growth rate to 8% (all else constant). Now what would be the equilibrium values of inflation and the real interest rate?
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2) The Russian government proposed an interesting fiscal plan few years ago. It had been unable to collect enough direct tax revenue to pay wages to many military and other government employees. The government announced it would print extra money one month in the future, and use this money to pay the employees. Consider the following questions. a) How do you think this announcement would affect the level of real money demand and the price level? When will these effects be felt – when the money supply increases, or earlier on the day of the announcement of the policy? b) How would this affect the nominal interest rate in Russia? 3) How bad is inflation in Zimbabwe? Based on the article below, what is likely to have caused hyperinflation in Zimbabwe?
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By MICHAEL WINES Published: May 2, 2006 The New York Times Ayina Musoni, 58, has taken in lodgers to help with expenses, but she can barely afford food for her family. Correction Appended HARARE, Zimbabwe , April 25 — How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417. No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750 — in American currency, about 69 cents. The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe's $500 bill, now the smallest in circulation. But what is happening is no laughing matter. For untold numbers of Zimbabweans, toilet paper — and bread, margarine, meat, even the once ubiquitous morning cup of tea — have become unimaginable luxuries. All are casualties of the hyperinflation that is roaring toward 1,000 percent a year, a rate usually seen only in war zones. Zimbabwe has been tormented this entire decade by both deep recession and high inflation, but in recent months the economy seems to have abandoned whatever moorings it had left. The national budget for 2006 has already been largely spent. Government services have started to crumble. The purity of Harare's drinking water, siphoned from a lake downstream of its sewer
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Hw5 - Sonoma State University Department of Economics...

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