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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

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?

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.

Suppose that each 0.1percentage point decrease in the equilibrium interest rate induces a \(10billion increase in real planned investment spending by businesses. In addition, the investment multiplier is equal to 5, and the money multiplier is equal to 4. Furthermore, every \)20billion increase in money supply brings about 0.1percentage point reduction in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal.

a. How much must real planned investment increase if the Federal Reserve desires to bring about a $100billion increase in equilibrium real GDP ?

b. How much must he money supply change for the Fed to induce the change in real planned investment calculated in part (a) ?

c. What dollar amount of open market operations must the Fed undertake to bring about the money supply change calculated in part (b) ?

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

a. Propose one monetary policy action that could eliminate the recessionary 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?

Describe how Federal Reserve monetary policy actions influence market interest rates
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