Question

Section 2: Quantity Theory of Money (4 parts, 25 points total) Suppose that velocity is constant, the money supply is growing by 3% per year, real GDP is growing by 2% per year, and the real interest rate is 0%. Using the quantity theory of money, the fisher equation, and the classical dichotomy answer the following questions about the long-run. Mark your answers on the scantron form. No need to show work for i) and ii). i) (2.5 points per question, 7.5 points total) 11) The inflation rate is... -1% 0% 1% 5% 12) The growth of nominal GDP is -1% 2% 3% d) 5% b) The nominal interest rate is -1% 0% 1% 3% d) ii) (2.5 points per question, 5 points total) Suppose the Federal Reserve increases the money growth rate by 2 percentage points, then the 14) a) b) change in the inflation rate is -2% 2% -5% 5% change in the real interest rate is 0% -2% 2% 5%

Solve and show all work for all questions posted for a rating. Thank you.

Answer 1

Quantity theory of money-

When velocity is zero

Inflation rate= money growth rate- real GDP growth rate

11. c. 1%

Reason- inflation rate= 3%-2%=1%

12. c. 3%

Reason- Growth rate of Nominal GDP= Real GDP growth rate+ inflation rate

= 2%+1%= 3%

13. c. 1%

Reason- Nominal interest rate= Real interest rate+ inflation rate= 0%+1%=1%

14. b. 2%

Reason- Since real GDP doesn't change, change in money growth rate is equal to the change in inflation rate.

15. b. -2%

Reason- Real interest rate falls by the same amount as rise in inflation rate assuming that the nominal interest rate remains the same.