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The demand for real money balances is given by M/P = Y/i, where M is the quantity of money, P is the price level, Y is output, and i is the nominal interest rate which is measured in percent. At the beginning of the year, the nominal interest rate is 2%. Over the year, the monetary base increases by 3%, the money multiplier increases by 2%, the output increases by 2% percent, and the nominal interest rate increases by 2 BASIS POINTS. (a) If the ex ante real interest rate equals 1%, find the expected inflation rate at the beginning of the year. (b) Calculate the percentage change in the velocity of money. (c) [In answering this question, you are allowed to use the approximations regarding percentage changes; see page 4 of the math review (slide set 3).] Calculate the actual inflation rate. (d) Is it true that purchasing power was transferred from borrowers to lenders?
This document contains various important questions and their appropriate answers in the subject field of Economics.
Economics is the study of the principles governing the allocation of scarce means among competing ends when the objective of the allocation is to maximize the attainment of the ends.
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