Question

Use the following information for the next 9 questions. You should draw a graph that depicts the situation below and use your picture to answer the questions Assume that wages and prices are sticky and that we start at a long-run equilibrium. Assume that at this initial point, the growth rate of the money supply is 8%, the growth rate of the velocity of money is 0% and that the real economic growth rate is 5%. Now assume that the Federal Reserve has decided to increase the growth rate of the money supply by 4% and that the Federal Reserve leaves the growth rate of the money supply at this elevated rate. ) Question 38 2 pts Now think about the point that the economy ends up at that is the new long-run equilibrium (Point What is the real economic growth rate? Hint: enter your answer without a % sign Example: if the answer is 2%, enter 2

Answer 1

Using Fischer's equation of exchange:

Taking log both sides and differentiating, we get:

$\frac{\Delta P}{P} +\frac{\Delta Y}{Y } = \frac{\Delta M}{M} +\frac{\Delta V}{V }$

▲P

Now Fed has decided to increase the growth rate of money supply by 4% => new growth rate of money supply = (8+4) = 12%

Since prices are sticky, growth rate of prices remain unchanged. Also growth rate of velocity of money is still zero.

$\frac{\Delta P}{P} +\frac{\Delta Y}{Y } = \frac{\Delta M}{M} +\frac{\Delta V}{V }$

9% 3 +