Use the quantity theory of money to answer the following questions. (a) (3 points) Write down...

 

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Use the quantity theory of money to answer the following questions. (a) (3 points) Write down the quantity equation in levels (i.e., not in terms of growth rates). Clearly explain in words the intuition behind the quantity equation (i.e., what it implies about the role of money). (a) The quantity equation: MV = PY (3) The quantity equation reflects the fact that we need money to make transactions and that the quantity of money that we need in order to make transactions over given time period of time is proportional to nominal GDP for that period. (b) (3 points) Assuming that the velocity of money is constant, if a country has an average annual growth rate of real GDP equal to 3%, then what is the average annual rate of money growth that would required to produce an average rate of inflation of 4%. Show your work. (b) 7%. (3 points) Assuming that the velocity of money is constant, if a country has an average annual growth rate of real GDP equal to 6%, an average real interest rate of 4%, and an average rate of money growth equal to 10%, then what is the average rate of nominal interest implied by the quantity theory of money? Show your work. (c) First find that average inflation is 4% and then that the average nominal interest rate is therefore 8%. Use the quantity theory of money to answer the following questions. (a) (3 points) Write down the quantity equation in levels (i.e., not in terms of growth rates). Clearly explain in words the intuition behind the quantity equation (i.e., what it implies about the role of money). (a) The quantity equation: MV = PY (3) The quantity equation reflects the fact that we need money to make transactions and that the quantity of money that we need in order to make transactions over given time period of time is proportional to nominal GDP for that period. (b) (3 points) Assuming that the velocity of money is constant, if a country has an average annual growth rate of real GDP equal to 3%, then what is the average annual rate of money growth that would required to produce an average rate of inflation of 4%. Show your work. (b) 7%. (3 points) Assuming that the velocity of money is constant, if a country has an average annual growth rate of real GDP equal to 6%, an average real interest rate of 4%, and an average rate of money growth equal to 10%, then what is the average rate of nominal interest implied by the quantity theory of money? Show your work. (c) First find that average inflation is 4% and then that the average nominal interest rate is therefore 8%.

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a The quantity equation MV PY states that the money supply M multiplied by the velocity of money V i... View the full answer