Question: Suppose that the real money demand function is where Y is real output, r is the real interest rate, and e is the expected rate

Suppose that the real money demand function is

where Y is real output, r is the real interest rate, and Ï€e is the expected rate of inflation. Real output is constant over time at Y = 150. The real interest rate is fixed in the goods market at r = 0.05 per year.
a. Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist forever. Currently, the nominal money supply is M = 300. What are the values of the real money supply and the current price level? (What is the value of the expected inflation rate that enters the money demand function?)
b. Suppose that the nominal money supply is M = 300. The central bank announces that from now on, the nominal money supply is going to grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of the real money supply and the current price level? Explain the effects on the real money supply and the current price level of a slowdown in the rate of money growth.

0.01Y

Step by Step Solution

★★★★★

3.37 Rating (184 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a e MM 10 i r e 15 MP L 001 x 150015 10 P 30010 3... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

797-B-E-M-E (7831).docx

120 KBs Word File

Students Have Also Explored These Related Economics Questions!

Suppose that the real money demand function is Where Y is the real output, r is the real interest rate, and is the expected inflation rate. Real output is constant over time at Y = 150. The real...

An economy is described by the following equations: Government purchases G and taxes T both equal 1000. The initial price level P equals 2.0, and expected inflation e is zero. Full-employment output...

In a particular economy the real money demand function is Md/P = 200 + 0.2Y - 2000i Assume that M = 300, P = 2.0, and e = 0.05. a. What is the real interest rate r that clears the asset market when Y...

Suppose that the real money demand function is: where Y is real output, ris the real interest rate, and z is the expected rate of inflation. Real output is constant over time at Y = 150. The real...

8. Real money demand in an all-currency economy with fixed real output and real interest rate, and constant inflation rate and money growth rate is L == 0.2Y - 500i, where Y is real income and i is...

Suppose that the real money demand function i s : L ( Y , r + e ) = Y 1 + r + e where Y i s real output, r i s the real interest rate, and e i s the expected rate o f inflation. Real output i s...

An economy has full-employment real output of 9000, and government purchases are 2000. Desired consumption and desired investment are as follows: Real Interest Rate (%) Desired Consumption Desired...

Suppose that the real money demand function is L(Y, r+ e) = (0.01 Y)/ (r+ e) where Y is real output, ris the real interest rate, and e is the expected rate of inflation. Real output is constant over...

Suppose that the real money demand function is L(Y,r + 7) 0.01Y (r + 7) where Y is real output, r is the real interest rate, and T is the expected rate of inflation. Real output is constant over time...

6 Suppose that the real money demand function is L( Y ) 0 _..::..:: 0 Y ,r+ne = - , r+ ne where Y is real output, r is the real interest rate, and It' is the expected rate of inflation. Real output...

Nick Santiago purchased a used for $35,000. Before the tractor could be used, it required new tires, which costs $2,200, and an overhaul, which cost $2,800. Its first tank of fuel cost $150. The...

1. Complete the following pulley system mechanical advantage chart, which lists two possible arrangements of fixed and movable pulleys for each given mechanical advantage. Can you arrange a pulley...

JMK owns a distribution factory that it uses to store its inventory. On 1 January 2 0 X 7 , the factory was sold to a large REIT for $ 9 , 2 7 0 , 0 0 0 . The factory had an original cost of $ 1 7 ,...

Which of the following is the decision for the Mann-Whitney U test for a two-tailed test at a .05 level of significance? a. Fail to reject the null hypothesis; student scores did not differ between...

Dumping is selling a product in a foreign market at a lower price than a firms own domestic market. You might think that this would require a comparison of actual prices charged in home markets...

1. A country has a comparative advantage if it has a lower ________ cost of producing a good 2. The terms of trade is the rate at which two goods can be ________ for one another. 3. Suppose a country...

1. If a country bans the importation of a particular good, the market equilibrium is shown by the intersection of the _____curve and the_____ curve. 2. The equilibrium price under an import quota is...

M Santos Trial balance December 31, 2011, a) Prepare a trading profit and loss report. (3 marks) b) Interpret the document above (5 marks) c) Provide THREE (3) recommendation based on findings

A manufacturing company is considering acquiring a new injection molding machine at a cost of a $120,000 Because of a rapid change in product mix the need for this particular machine is expected to...

Given the Measures of correlation, in each measure write your null and alternative hypothesis Pearson r Gutmans Lambda Spearman Rho Goodman and Kruskal's Gamma Point Biserial