11S_Quiz1 - (c) (1 mark) Find the quantity of real money...

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1 Name __________________ Econ 204: Intermediate Macroeconomics Quiz 1, Spring 2011 Formulas: Simple money demand: ( M / P ) d = k Y General money demand: ( M / P ) d = L ( i, Y ) Quantity equation: MV = PY Fisher Equation: i = r + Consider a money market characterized by simple money demand. Suppose velocity is constant, nominal money supply is growing 4% per year, real output is growing 2% per year, and real interest rate is 2%. (a) (1 marks) (i) Briefly explain the Quantity Theory of money; (ii) Find the nominal interest rate, i . (b) (1 mark) Suppose the growth rate of real output falls to 1% per year. What should BoC do in order to keep inflation constant? Now consider a money market characterized by general money demand. In particular, the money demand function is ( M / P ) d = Y / i 0.1 . Initially, Y = 100, i = 4%, E = 0 and P = 1.
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Unformatted text preview: (c) (1 mark) Find the quantity of real money demanded, ( M / P ) d . What is the nominal money supply in equilibrium? 2 Assume that people believe that the central bank will soon increase the nominal money supply by 5% per year. This will increase inflationary expectations to 5% per year. (d) (1 mark) According to Fisher equation, what will happen to i ? If the real output remains constant, find the new quantity of real money demanded. (e) (1 mark) For the money market remains in equilibrium what should be the new price level? Given the nominal money supply remains unchanged. Bonus. (1 mark) Relate part (d) and (e) to Cagan model. Discuss how adding i to the money demand model yields an additional channel through which money supply affects the price level....
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This note was uploaded on 01/27/2012 for the course ECON 204 taught by Professor Beryl li during the Spring '11 term at University of Victoria.

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11S_Quiz1 - (c) (1 mark) Find the quantity of real money...

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