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Scan 120250002 - Question Two Money and Inflation...

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Unformatted text preview: Question Two: Money and Inflation, Chapter #4 {worth up to 70 points) The Central Bank in your economy has just announced that it may have to raise the supply of nominal money in the economy (M2). Now, the Central Bank really has no intention of actually increasing the supply of nominal money, but it has made this announcement nonetheless. The public is aware of this announcement. (1) Using the Money and Inflation Theory we developed in lecture and discussed in the textbook, describe the logic AND EXPLAIN WHY in words or graphs, to show what will happen to the following macroeconomic variables: (FOR FULL CREDIT YOU NEED TO JUSTIFY EACH OF YOUR AN SWERS.) The public’s expectations about prices in the future (5 points possible) The real interest rate (5 points possible) The nominal interest rate (5 points possible) The demand for real money balances (M2/P)D( 5 points possible) The level of real income (5 points possible) The income velocity of money (5 points possible) The price level (P) (5 points possible) The marginal productivity of labor (10 points possible) (2) Explain and show (you can also use a graph) how a FALL IN THE DEMAND FOR INVESTMENT can lead to a change in the overall price level (P) that would be in the opppsite direction as the price level change youpwould anticipate in (1) above. (15 points possible). (3) If the yield curve on USA Treasury Bills suddenly rises for all time periods, given our inflation theory what does this mean for the actual price level? Immediately (5 points possible) In the future (5 points possible) Page 3 of 4 ...
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