How monetary policy might be able to return an economy

Reference no: EM131833199

Question: This chapter is concerned mostly with how monetary policy might be able to return an economy quickly to the potential growth rate after a shock. Discussion of the quantity theory of money, a market economy has a correction mechanism to return itself slowly to the potential growth rate after a shock: flexible prices. Let's review the quantity theory, and remember that in the quantity theory, inflation does all of the adjusting. Recall that: M^→+ v^→ = Inflation + Real growth

a. Consider the nation of Kyd land. Before the shock to Kyd land's economy, M^→ = 10%, v^→ = 3%, real growth = 4%. What is inflation?

b. In Kydland, v^→ falls to 0%, but M^→ stays the same. In the long run, what will inflation equal? What will real growth equal?

c. Consider the nation of Prescottia. Before the shock to Prescottia's economy, M^→= 2%, v^→ = 4%, real growth = 2%. What is inflation?

d. In Prescottia, v^→ rises to 8%. In the long run, what will inflation equal? What will real growth equal?

e. Consider the nation of Friedmania. Before the shock to Friedmania's economy, M^→ = 3%, v^→ = 0%, real growth = 3%. What is inflation?

f. In Friedmania, M^→ falls to 1%. In the long run, what will inflation equal? What will real growth equal?

Reference no: EM131833199

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