Monetary economics homework 2

Monetary economics homework 2 - D ustin Johnston Monetary...

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Dustin Johnston 11/14/2009 Monetary Economics Homework 3 1A. According to the Equation of Exchange an increase in money growth means a long term rise in inflation as in the long run the velocity of money and real growth in the economy are constant, meaning a direct correlation. An in crease in inflation is the same thing as saying a loss of purchasing power because that is essentially what inflation is, the loss of value in the dollar; in the United States this is typically measured by the CPI. In summation more money means each unit of money is worth less. B. Because of financial innovations allow people to reduce the amount of cash, because they can easily transfer it between accounts using a debit card money is transferred much faster and the velocity of money increases a great deal. However this also means that because people can now take money directly out of their savings account with little or no penalty there is much less demand for money in general. C. Because of the deep depression of the 1930s there was less money being transferred between people because the stock market had crashed and there was less faith in the government. This caused the velocity of money to plummet because there were fewer individuals holding the currency and even fewer transactions at this time, at this time in history the concept of barter became popular once again. D. If the bond rate were to reach zero there would be no incentive to hold money in savings accounts as because of inflation your money would constantly be losing value. The velocity of money would increase in the short run but fall to almost zero in the long run as inflation caused
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This note was uploaded on 06/20/2011 for the course ECO 363 taught by Professor Fred during the Spring '09 term at Sam Houston State University.

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Monetary economics homework 2 - D ustin Johnston Monetary...

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