1. a. Let the money supply be 500 and the velocity be 3. Write a function...
1. a. Let the money supply be 500 and the velocity be 3. Write a function representing the aggregate demand curve (assuming that velocity is independent of the price level).
b. If the long-run equilibrium level of output is 100, what will the equilibrium price level be?
c. On a graph, show what will happen in the short run to the price level and output if velocity falls to 2. (You do not need to find numbers for this one.)
d. Show what will happen in the long run if velocity remains low and nothing else happens. Show ALL curves that move and give a number for the new price level.
e. If the central bank wants to avoid this what could they do? (I DO want a number for this one.)
Homework Answers
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1. a. Let the money supply be 500 and the velocity be 3. Write a
function...
1. Let the money supply be $200 and the velocity of money be 2.5. Also let...
1. Let the money supply be $200 and the velocity of money be 2.5. Also let LRAS be Y=50. a.Write a function representing aggregate demand and give an equilibrium price level in the long run. b.Now imagine that due to “animal spirits” velocity falls to 2. Show the effect of this in the short run on AS/AD. (Show all the curves.) c. If the central bank wants to keep the price level unchanged after the drop in velocity, what should...
4. The money base is $300, the reserve requirement is 5%, banks hold no excess reserves...
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4. The money base is $300, the reserve requirement is 5%, banks hold no excess reserves...
4. The money base is $300, the reserve requirement is 5%, banks hold no excess reserves and the public holds no currency. a. What is M2? b. If the velocity of M2 is 4 (and this is independent of output and the price level), write a function representing aggregate demand for this economy. c. If the long-run equilibrium level of output is 400, what is the equilibrium price level? d. Show what will happen in both the short run and...
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•because ( the federal reserve controls M/ velocity is assumed
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• if the velocity of money is 2, the money supply in this
economy is ($4.5 trillion/ $18 trillion/ $27 trillion/ $36
trillion/ $45trillion /$54 trillion)
•because ( the federal reserve controls M/ velocity is assumed
to be constant/ the AD curve is downward sloping ), the percentage
increase in the price level Is ( less then/ the same as/ greater
then ) the percentage increase im the money supply. the illustrates
the ( importance of the federal reserve /...
Using the IS-LM and Aggregate Supply-Aggregate Demand (AS-AD) models of Chapter 12 with a flat short-run AS curve (that is, completely sticky prices), suppose the economy is at the natural rate of unemployment and so, at long-run equilibrium. Suddenly, taxes are reduced with no change in government spending. Tell me (or show on a graph) what happens to the IS and/or LM curves. Show on a different graph what happens on the AS-AD diagram in the short-run (drawing in the...
19. Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equi- librium and aggregate demand shifts right, what must the central bank do, and what will happen to output? a. The central bank must decrease the money supply, which will move output back toward its long-run level. b. The central bank...
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Suppose that the economy is at long-run equilibrium. a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate supply. b. Now suppose that a severe decline in the value of homes has affected the entire economy. Use your diagram to show what happens to output, employment, and the price level in the short run. Explain how households and businesses will adjust to this unanticipated shock to the...
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