Reference no: EM131305769
Q1. In quantity theory of money model, MV = PY, assume that V is constant, M is growing at 6% per year, Y is growing at 3%.
a. If r = 2, what is i?
b. If the Fed reduces the money growth rate by 2% points per year, what would be effect on i, given r = 2?
c. If the growth rate of Y increases to 5% per year, what would be the effect on inflation? Interest rate?
Q2. The money supply and money demand functions of an economy are as follows:
Money supply: (M/P)s
Money demand: (M/P)d = L (i, Y) = 0.2Y/0.5i
d. What is the velocity of money in this economy?
e. If output is 1000 units, i is 4 percent and money supply M is $1,200, what is the price level P?
f. If money supply increases by 5%, what will be the impact on price level if the output increases by 2% and the interest rate remains constant?
g. If money supply increases by 5%, what will be the impact on price level if the output increases by 2%, interest rate by 1%?
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