Tutorial 3 - Money and Inflation Revised

# Tutorial 3 - Money and Inflation Revised - U.S What are the...

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1 Tutorial 3 Money and Inflation Short Answer Questions 1. Write the quantity equation and explain it. 2. What does the assumption of constant velocity imply? 3. If inflation rises from 6 to 8 percent, what happens to real and nominal interest rates according to the Fisher effect? 4. Explain the roles of monetary and fiscal policy in causing and ending hyperinflation. 5. Define the terms “real variable” and “nominal variable”, and give an example of each. Applications 1. In the country of Abracadabra, the velocity of money is constant. Real GDP grows by 5 percent per year, the money stock grows by 14 percent, and the nominal interest rate is 11 percent. What is the real interest rate? 2. Suppose you are advising a small country (such as Barbados) on whether to print its own money or to use the money of its larger neighbour (such as the
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Unformatted text preview: U.S.). What are the costs and benefits of a national money? Does the relative political stability of the two countries have any role in the decision? 3. Suppose that consumption depends on the level of real money balances (on the grounds that real money balances are part of wealth). Show that if real money balances depend on the nominal interest rate, then an increase in the rate of money growth affects consumption, investment, and the real interest rate ( the loanable funds model will help with determining what happens to the real interest rate ). Does the nominal interest rate adjust more than one-for-one or less than one-for-one to expected inflation? This deviation from the classical dichotomy and the Fisher effect is called the “Mundell-Tobin effect”. How might you decide whether the Mundell-Tobin effect is important in practice?...
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