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.
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Why might the fact that private economic forecasters compete to sell their services help to constrain behavioural tendencies for too much optimism in projections of real GDP growth? Explain your reasoning.
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?
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, investment is billion. At 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 contractionary monetary policy. It sells billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out numerical consequences of the associated increase in interest rates on all other variables mentioned.
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?
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?
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