2. In a small economy, the level of nominal GDP is $4,000,000. The current level of money supply is $500,000. Velocity is stable, and the growth rate of real GDP is expected to be 2% over the next year. Money is expected to grow at 3%. Use this information to answer the following questions: a. What is the velocity of money circulation in this economy? b. What is the expected inflation rate in this economy?
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In this economy, the level of nominal GDP is $4,000,000. The current level of money supply is $500,000. Velocity is stable, and the growth rate of real GDP is expected to be 2% over the next year. Money is expected to grow at 3%. Show more…
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Andrew D.
QUESTION THREE Assuming a constant velocity of money while the money supply is growing 10% per year, real GDP is growing at 4% per year, and the real interest rate is r = 8%. Assume that actual Inflation is equal to expected inflation. a) Find the value of the nominal interest rate in this economy b) If the central bank increases the money growth rate by 4% per year, find the change in the nominal interest rate Ai C) Suppose the growth rate of Y falls to 2% per year. What will happen to inflation? What must the central bank do if it wishes to keep inflation constant?
Answer parts $a$ and $b,$ below, on the basis of the following information for a hypothetical economy in year 1 : money supply $=\$ 400$ billion; long-term annual growth of potential $\mathrm{GDP}=3$ percent; velocity $=4 .$ Assume that the banking system initially has no excess reserves and that the reserve requirement is 10 percent. Also assume that velocity is constant and that the economy initially is operating at its fullemployment real output. a. What is the level of nominal GDP in year 1 ? b. Suppose the Fed adheres to a monetary rule through open-market operations. What amount of U.S. securities will it have to sell to, or buy from, banks or the public between years 1 and 2 to meet its monetary rule?
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