# Undertaking do to the quantity of moneymoney supply d

• 4

This preview shows page 4 out of 4 pages.

4 undertaking do to the quantity of money/money supply? d. How can the Reserve Bank influence the cost of borrowing? The Quantity Theory of Money: Activity 11.7 Quantecon is a country in which the quantity theory of money operates. In year 1, the economy is at full employment and real GDP is \$400 million, the price level is 200, and the velocity of circulation is 20. In year 2, the quantity of money increases by 20 per cent. Calculate the quantity of money, the price level, real GDP and the velocity of circulation in year 2. The Money Market: Activity 11.8 The spreadsheet provides information about the demand for money in Minland. Column A is the nominal interest rate, r. Columns B and C show the quantity of money demanded at two values of real GDP: Y0is \$10 billion and Y1is \$20 billion. The quantity of money supplied is \$3 billion. Initially, real GDP is \$20 billion. What happens in Minland if the interest rate (i) exceeds 4 per cent a year and (ii) is less than 4 per cent a year? iii) In Minland, the interest rate is 4 per cent a year. Suppose that real GDP decreases to \$10 billion and the quantity of money supplied remains unchanged. Do people buy bonds or sell bonds? Explain how the interest rate changes. Which interest rate is determined in the money market, the nominal interest rate or the real interest rate? Explain your answer. A B 1 r Y0 Activity 11.9 i) Explain the change in the nominal interest rate in the short run if a. Real GDP increases. b. The money supply increases. c. The price level rises. ii) Which interest rate is determined in the money market, the nominal interest rate or the real interest rate? Explain your answer. A B 1 r Y0 C Y12 7 1.0 1.5 3 6 1.5 2.0 4 5 2.0 2.5 5 4 2.5 3.0 6 3 3.0 3.5 7 2 3.5 4.0 8 1 4.0 4.5
• • • 