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Unformatted text preview: Econ 204 Instructor: J. Li 1 QUIZ 1 ANSWERS, FALL 2011 Simple money demand: ( M / P ) d = k Y General money demand: ( M / P ) d = L ( i, Y ) = Y /2 i Quantity equation: MV = PY (a) Explain: difference between quantity equation and QTM – QTM assumes velocity in quantity equation is constant over time. +0.3 Explain: how price level is determined by QTM. Given constant velocity the nominal GDP ( PY ) is determined by money supply; +0.4 real GDP (or Y ) is determined by factor production; +0.4 therefore the price level is determined by the nominalto real GDP ratio ( PY / Y ). +0.4 (b) Given: simple money demand and quantity equation. Find and explain: k In equilibrium real money balances ( M / P ) equal ( M / P ) s = ( M / P ) d = kY +0.25 where M / P is the purchasing power of the stock of money. Rewrite the above equation we have M × (1/ k ) = PY k = 1/ V +0.25 Interpretation: when people hold lots of money relative to their incomes, money changes hands infrequently ( V is small),...
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 Spring '11
 Beryl Li
 Macroeconomics, Inflation, Nominal Interest Rate, Quantity Equation

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