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Chapter 16: Q.8 (page 369)

Suppose that the quantity of money in circulation is fixed but the income velocity of money doubles. If real GDP remains at its long-run potential level, what happens to the equilibrium price level?

Short Answer

Expert verified

The equilibrium price level increases with respect to the real GDP.

Step by step solution

01

introduction

Greater costs would prompt elevated degrees of GDP and this would raise elevated degrees of balance cost.

02

explanation part (1)

In such cases, the rising interest wouldn't increment as the pay levels increment and one requirement to comprehend the expanded pay of individuals needs to get multiplied as far as the worth increment of the buying power and the interest of labour and products would increment according to the inventory for the given labour and products at last lead to excessive cost regarding more appeal.

03

explanation part (2)

As far as the money dissemination as fixed needs to contribute as for the ascent in the harmony cost, it must be concerning the balance cost and it needs to work close by with the providers of the labour and products which wouldn't have admittance to regarding the higher money. With the given genuine GDP it is the cost intelligent regarding the worth of labour and products concerning the ongoing year.

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Most popular questions from this chapter

Identify the key factors that influence the quantity of money that people desire to hold.

Take a look at Figure 16-6. Suppose that a multiple reduction in GDP is the final outcome that the Fed desires in the last box in the figure. Explain the required directions of efforts - that increases or decreases - that most occur in the preceding boxes in the figure in order to yield in this desired decrease in real GDP

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 4.

c. The planned investment schedule is such that at a 4percent rate of interest, investment is \(1400billion. At 5percent, investment is \)1380billion.

d. The investment multiplier is 5.

e. The initial equilibrium level of real GDP is \(19trillion.

f. The equilibrium rate of interest is 4percent.

Now the Fed engages in contractionary monetary policy. It sells \)2billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out numerical consequences of the associated increase in interest rates on all other variables mentioned.

Consider figure 16-7. Discuss a specific monetary policy action that Fed's Trading Desk could implement in order to induce the effects traced out by this figure.

Take a look at the two panels of figure 16.2, and also consider figure 16-1. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at inducing individuals & businesses to demand a smaller quantity of money. Use appropriate panel of figure 16-2 to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading desk should buy or sell bonds.
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