PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 10, Problem 5RQ
To determine
Explain velocity and determine how the introduction of new payment technologies affected velocity.
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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…
Suppose the money supply M has been growing at 19% per year and nominal GDP, PY, has been growing at 77% per
year. The data are as follows (in billions of dollars).
M
PY
V
2021
400
4000
2022
476
7080
2023
566.44
12,532
Calculate the velocity V in each year. (Fill in the table above, rounding to one decimal place.)
Velocity is growing at an approximate rate of % per year. (Round to the nearest whole number.)
In 1992, several European countries had their individual currencies pegged to the ECU (a pre-cursor to the euro) in anticipation of forming a common currency area. In practice, this meant that countries were pegged to the German deutschmark (DM). This question considers how two different countries responded to the European Exchange Rate Mechanism (ERM) Crisis. For the following situations, you need only consider short-run effects. Also, treat Germany as the foreign country.
(a) Following the economic consequences of German reunification in 1990, the Bundesbank (Germany’s central bank) raises its interest rate. On September 14, 1992, Great Britain decided to float the British pound (£) against the DM. Using the foreign exchange market, the money market, and treating Britain as the home country, graphically illustrate the effects of Germany increasing its interest rate on Great Britain.
(b) After Britain abandoned the ERM (e.g., allowed its currency to float against the DM), investors…
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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