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?
The equilibrium price level increases with respect to the real GDP.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Suppose that to finance its credit policy, the Fed pays an annual interest rate of 0.50 per cent on bank reserves. During the course of the current year, banks hold $1 trillion in reserves. What is the total amount of interest the Fed pays banks during the year?
You learned in an earlier chapter that if there is an inflationary gap in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust upward, causing the short-run aggregate supply curve to shift upward and to the left and pushing equilibrium real GDP per year back to its long-run value. In this chapter, however, you learned that the Federal Reserve can eliminate an inflationary gap in the short run by undertaking a policy action that reduces aggregate demand.
a. Propose one monetary policy action that could eliminate an inflationary 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?
Why do you suppose that corporate cash holdings have decreased slightly since 2015?
Assume that the following conditions exist :
a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.
b. The money multiplier is .
c. The planned investment schedule is such that at a percent rate of interest, the investment is billion; at 5 percent, investment is billion
d. The investment multiplier is .
e. The initial equilibrium level of real GDP is trillion.
f. The equilibrium rate of interest is percent.
Now the Fed engages in expansionary monetary policy. It buys billion worth of bonds, which increases the money supply, which in turn lowers the market rate of interest by percentage point. Determine how much money supply must have increased, and then trace out the numerical consequences of the associated reduction in interest rates on all the other variables mentioned.
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.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
