Question

In: Economics

1. Suppose the velocity of money is constant. Real GDP grows by 6 percent per year,...

1. Suppose the velocity of money is constant. Real GDP grows by 6 percent per year, the money stock grows by 10 percent per year and the real interest rate is 5 percent. According the information above the nominal interest rate is ____________ percent.

a. 1

b. 9

c. 16

d. 4

e. 11

2. The natural rate of unemployment may be reduced by

a.

increase in minimum wages.

b.

efficiency wages.

c.

generous unemployment insurance.

d.

public retraining programs.

3.

Assume that the currency-deposit ratio is 0.4 and the required reserve ratio is 0.3. The Federal Reserve carries out open-market operations, selling $4 million worth of bonds to banks. This action will decrease the money supply by ______________ million.

a.

$3.5

b.

$8

c.

$2.8

d.

$4

e.

$12

4.

Suppose V is constant, M is growing 9% per year, Y is growing 4% per year, where V is velocity,  M is the quantity of money, and  Y is real output. Suppose the growth rate of Y rises to 6% per year. To keep inflation constant the Fed must __________ the money growth rate by __________ percentage point per year.

a.

increase; 1

b.

reduce; 2

c.

increase; 2

d.

reduce; 1

Solutions

Expert Solution

1) Use quantity equation of exchange

g% + p% = m% + v%

p% = m% + v% - g%

= 10% + 0% - 6%

= 4%

Now real interest rate = nominal interest rate - inflation

5 + 4 = 9% = nominal interest rate

select B

2) Select D

3) Select B

4) Select C.


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