Suppose the growth rate of nominal GDP is 10% per year and the growth rate of real GDP is 2% peryear. According to the quantity theory of money, the money growth rate is most likely to be: 1.2% per year 2.12% per year 3.10% per year 4.8% per year
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Suppose the growth rate of nominal
1.2% per year
2.12% per year
3.10% per year
4.8% per year
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- In an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of money V i.e. M = PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) ΔΜ = +g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ebi The nominal interest rate i is determined by i = r" +7, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g = 0.03, r" = 0.05, b =1, and Vo = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is T = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.10? (c) What rate of inflation maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?Japan's central bank, the Bank of Japan, has an inflation target of -0.25% per year (or rather "Deflation Target"). According to the Quantity Theory of Money, by how much must the Bank of Japan grow the money stock in order to hit its inflation target? A) The Bank of Japan must increase the money stock by 0.25% per year. B) The Bank of Japan must decrease the money stock by 0.25% per year. C) The Bank of Japan must increase the money stock by 0.25% per month. D) The Bank of Japan must decrease the money stock by 0.25% per month.How is the Inflation-free interest rate an estimate of the true earning power of money?
- In an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of i.e. M - PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) money V ΔΜ =*+g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ehi The nominal interest rate i is determined by i = r" +T, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g= 0.03, r" = 0.05, 6 =1, and V" = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a =0.10? (c) What rate of inflation w maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?According to the long-run relationship between money growth, income growth, and the change in the price level, if European inflation is higher than U.S. inflation but money growth is the same, it must be that: a) real income growth in Europe and the United States is the same. b) real income growth in Europe is larger than real income growth in the United States. c) real income growth in the United States is higher than in Europe. d) the level of nominal income is higher in Europe than in the United States.Suppose that the real money demand function is L(Y,r+πe)=0.3Y÷ (r+πe) Where Y is real output, r is the real interest rate, and πe is the expected rate of inflation. Real output is constant over time at Y = 1500. The real interest rate is fixed in the goods market at r = 0.5 per year. Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist for ever. Currently, the nominal money supply is M = 400. What are the values of the real money supply and the current price level? (Hint: What is the value of the expected inflation rate that enters the money demand function?). Suppose that the nominal money supply is M = 400. The Bank of Namibia announces that from now on the nominal money supply will grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of real money supply and the current price level? Explain the effects on the…
- Most central banks, like the Bank of England, set targets for their economy's inflation rate. The Bank of England has an inflation target of 3.5% per year. According to the Quantity Theory of Money, by how much must the Bank of England grow the money stock in order to hit its inflation target? The Bank of England must decrease the money stock by 3.5% per year. The Bank of England must increase the money stock by 3.5% per year. The Bank of England must decrease the money stock by 3.5% per month. The Bank of England must increase the money stock by 3.5% per month.The Federal Reserve, the central bank of the United States, has an inflation target of 0.3% per month. According to the Quantity Theory of Money, by how much must the Federal Reserve grow the money stock in order to hit its inflation target? The Federal Reserve must decrease the money stock by 0.3% per year. The Federal Reserve must increase the money sock by 0.3% per year. The Federal Reserve must decrease the money stock by 0.3% per month. The Federal Reserve must increase the money stock by 0.3% per month.In the country of Winterfell, the velocity of money is constant. GDP growth is 4% per year, the money stock grows at 14% per year, and the nominal interest rate is 11%. What is the real interest rate? (If your answer is 0.012, please write 1.20, do not include %)
- The central bank has announced that it is going to lower the rate of monetary growth from 12% per year to 5% per year. Most likely, this announcement will Select one: a. increase money demand, shifting the LM curve up and to the left. b. increase money demand, shifting the LM curve down and to the right. c. decrease money demand, shifting the LM curve up and to the left. d. decrease money demand, shifting the LM curve down and to the right.Over the past 12 years, Zambia has experienced an inflation rate of 9.8% per year. What does this suggest about the growth of Zambia's money stock according to the Quantity Theory of Money? Zambia's money stock has decreased by 9.8 percent per year over the past 12 years. Zambia's money stock has increased by 0.817 percent per year over the past 12 years. Zambia's money stock has increased by 9.8 percent per year over the past 12 years. Zambia's money stock has decreased by 0.817 percent per year over the past 12 years.Consider two countries, Hitech and Lotech . In Hitech new arrangements for making payments, such as credit cards and ATMs, have been enthusiastically adopted by the population, thereby reducing the proportion of income that is held as real money balances. Over this period no such changes occurred in Lotech . If the rate of money growth and the growth rate of real GDP were the same in Hitech and Lotech over this period, then how would the rate of inflation differ between the two countries? Carefully explain your answer.
