In: Economics
1. Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion and real GDP is $5 trillion.
c. Suppose that velocity is constant and the economy's output of goods and services rises by 5% each year. What money supply should the Fed set next year if it wants to keep the price level stable?
d. Suppose that velocity is constant and the economy's output of goods and services rises by 5% each year. What money supply should the Fed set next year if it wants inflation of 10%?
2) What is the discount rate? What happens to the money supply if the Fed lowers the discount rate? What is money? What distinguishes money from other assets in the economy?
3)What is money? What distinguishes money from other assets in the economy?
2) The discount rate is the interest rate that the Fed charges when it gives loans to banks. Banks borrow from the Fed only when they have too few reserves to meet reserve requirements.
The lower the discount rate, the cheaper are borrowed reserves, and the more banks borrow from the Fed. Thus, a reduction in the discount rate increases the monetary base and the money supply.
3) Money is the stock of assets that can be readily used to make transactions. It has three purposes. It is a store of value, a unit of account and a medium of exchange.
Money is the most liquid asset available in the economy, that can be used to make transactions readily. It is different from the other assets in the economy because those assets vary in liquidity.