Draw a graph of money demand and money supply with the nominal interest rate on the vertical axis and money balances on the horizontal axis. Assume the central bank is following a money growth rule where its sets the growth rate of money supply to zero. Use the graph to illustrate how fluctuations in velocity imply that targeting money growth results in greater volatility of interest rates.
Answer to relevant QuestionsUsing the same graph as that described in Problem, show how the central bank could use its control over the quantity of money to target a particular interest rate in the face of changes in velocity. If velocity were constant at 2 while M2 rose from $5 trillion to $6 trillion in a single year, what would happen to nominal GDP? If real GDP rose 3 percent, what would be the level of inflation? Plot the percentage change from a year ago of the velocity of money (FRED code: A14187USA163NNBR) between 1922 and 1939. Compare the typical scales of the velocity declines during the recessions of this “interwar” period ...Explain why the short-run aggregate supply curve is upward sloping. Under what circumstances might it be vertical? The European Central Bank’s primary objective is price stability. Policymakers interpret this objective to mean keeping inflation below, but close to, 2 percent, as measured by a euro-area consumer price index. In ...
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