macroeconomics asu 3

1--1.5 1.33--2 2--3.5 4--7 MS1 MS2 According to your graph, the equilibrium value of money is , therefore the equilibrium price level is .Now, suppose that the Fed increases the money supply from the initial level of $3.5 billion to $7 billion. In order to increase the money supply, the Fed can use open-market operations to the public. At the initial equilibrium value of money and price level, the quantity of money supplied is now than the quantity of money demanded. This expansion in the money supply will people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will and the value of money will

1 .75 .5 .25 up 3.5 up 7 .5 2 buy bonds from greater increase rise fall

The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. .8 __ 2 1 __ 2.5 1.33 __ 4 2 __ 8 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the money the typical transaction requires, and the money people will wish to hold in the form of currency or demand deposits. Assume that the Fed initially fixes the quantity of money supplied at $4 billion. Use the orange line (square symbol) to plot the initial money supply ( ) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. MS1 money demand MS2 According to your graph, the equilibrium value of money is , therefore the equilibrium price level is . Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion. In order to reduce the money supply, the Fed can use open-market operations to the public. Use the purple line (diamond symbol) to plot the new money supply ( ). At the initial equilibrium value of money and price level, the quantity of money supplied is now than the quantity of money demanded. This contraction in the money supply will people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will and the value of money will

1.25 1 .75 .5 less less up on 4 1.25-2 1-2.2 .75-4 .5-8 up 2.5 .75 1.33 sell bonds to less reduce fall rise

Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2015, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. 2015 320 __ 8 600 __ 2016 336 15 __ 600 __ The money supply grew at a rate of from 2015 to 2016. Since pen output did not change from 2015 to 2016 and the velocity of money , the change in the money supply was reflected in changes in the price level. The inflation rate from 2015 to 2016 was

15 4800 8.4 5040 5 remain the same entirely 5

Musashi receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Musashi's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario.

2-9.5-6.5-5.85-3.85 9.5-4.5-14-12.6-3.1

2016-360--9-800-- 2017-378-20--800--7560

20 7200 9.45 7560

Consider Snackistan, a hypothetical country that produces only burgers. In 2013, a burger is priced at $2.00. Complete the first row of the table with the quantity of burgers that can be bought with $900. Note: In this problem, assume it is not possible to buy a fraction of a burger, and always round down to the nearest whole burger. 2013 2 __ 2014 __ __ Suppose the government of Snackistan cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 40% by 2014. Assuming monetary neutrality holds, complete the second row of the table with the new price of a burger and the new quantity of burgers that can be bought with $900 in 2014. The impact of the government's decision to raise revenue by printing money on the value of money is known as the

450 2.8 321 inflation tax

before 11-5-5-- -- after 11-5-6-- -- Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 5% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily benefits Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will to per year

6 6 7 5 banks rise 12

Tim receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Tim's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario 2 4.5 __ __ __ 8.5 4.5 __ __ __ Compared with lower inflation rates, a higher inflation rate will the after-tax real interest rate when the government taxes nominal interest income. This tends to saving, thereby the quantity of investment in the economy and the economy's long-run growth rate

6.5 5.85 3.85 13 11.7 3.2 decrease discourage decreasing decreasing

Suppose the nominal interest rate on car loans is 11% per year, and both actual and expected inflation are equal to 4%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. before 11 4 4 __ after 11 4 6 __ Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily harms . Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will to %per year

7 7 7 5 lenders rise 13

The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction. Maria spends all of her money on comic books and donuts. In 2012, she earned $27.00 per hour, the price of a comic book was $9.00, and the price of a donut was $3.00. Which of the following give the nominal value of a variable? Check all that apply. Which of the following give the real value of a variable? Check all that apply. Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, Maria's wage has risen to $54.00 per hour. The price of a comic book is $18.00 and the price of a donut is $6.00. In 2017, the relative price of a comic book is . Between 2012 and 2017, the nominal value of Maria's wage , and the real value of her wage . Monetary neutrality is the proposition that a change in the money supply nominal variables and real variables

Maria's wage is $27.00 per hour in 2012. The price of a donut is $3.00 in 2012. Maria's wage is 9 donuts per hour in 2012. The price of a comic book is 3 donuts in 2012. 3 donuts increases remain the same affects does not affect

Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one cup of coffee, one donut, and one newspaper. In year one, the basket costs $9.00. In year two, the price of the same basket is $8.00. From year one to year two, there is at an annual rate of . In year one, $72.00 will buy baskets, and in year two, $72.00 will buy baskets. This example illustrates that, as the price level falls, the value of money

deflation 11.11 8 9 rises

Sam manages a grocery store in a country experiencing a high rate of inflation. To keep up with inflation, he spends a lot of time every day updating the prices, printing new price tags, and sending out newspaper inserts advertising the new prices. His employees regularly deal with customer annoyance over the frequent price changes. This is an example of the of inflation

menu costs

Kenji manages a grocery store in a country experiencing a high rate of inflation. He is paid in cash twice per month. On payday, he immediately goes out and buys all the goods he will need over the next two weeks in order to prevent the money in his wallet from losing value. What he can't spend, he converts into a more stable foreign currency for a steep fee. This is an example of the

shoe-leather costs