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Chapter 16: Q.9 (page 369)

Suppose that following adjustment to the events in Problem 16-8, the Fed cuts the money supply in half. How does the price level now compare with its value before the income velocity and the money supply change?

Short Answer

Expert verified

The price level is now double as compared with its value before the income velocity and the money supply change

Step by step solution

01

introduction

It is the times one unit of money can be utilized to enjoy as for the labour and products bought and spent per unit throughout some stretch of time.

02

explanation

We know,

MV=PY

M = circulating money

V = income velocity

P = equilibrium price level

Y = real GDP

In the event that the Feds halves the Money supply down the middle and with the given Y staying at its for some time run potential level would bring about a doubling of the income velocity of money V. The price level is now double as compared with its value before the income velocity and the money supply change

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Most popular questions from this chapter

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?

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

Explain how the Federal Reserve has implemented a credit policy since 2008.

You learned in an earlier chapter that if there is an inflationary gap in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust upward, causing the short-run aggregate supply curve to shift upward and to the left and pushing equilibrium real GDP per year back to its long-run value. In this chapter, however, you learned that the Federal Reserve can eliminate an inflationary gap in the short run by undertaking a policy action that reduces aggregate demand.

a. Propose one monetary policy action that could eliminate an inflationary gap in the short run.

b. In what way might society gain if the Fed implements the policy you have proposed instead of simply permitting long-run adjustments to take place?

Imagine working at the Trading Desk at the New York Fed. Explain whether you would conduct open market purchases or sales in response to each of the following events. Justify your recommendation.

a. The latest FOMC Directive calls for an increase in the target value of the federal funds rate.

b. For a reason unrelated to monetary policy, the Fed's Board of Governors has decided to raise the differential between the discount rate and the federal funds rate. Nevertheless, the FOMC Directive calls for maintaining the present federal funds rate target.
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