ECO 202 HW 7

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Based on the quantity theory of​ money, if velocity is​ constant, inflation is likely to occur​ when:

The money supply grows at a faster rate than real GDP.

Velocity is defined as

V = (P x Q) / M; V=(P x Y)/M

The quantity theory of money seeks to explain the connection between money and

prices

To decrease the money​ supply, the Federal Reserve could

raise the required reserve ratio.

The government budget constraint shows that a government has​ ________ ways to pay for government​ spending, and these ways are

three; collecting​ taxes, borrowing by issuing​ bonds, or printing money.

Governments sometimes allow hyperinflation to occur because

when governments want to spend more than they collect in​ taxes, central banks increase the money supply at a rate higher than GDP​ growth, often resulting in hyperinflation.

The government budget constraint shows that a government has​ ________ way(s) to finance a budget​ deficit, and​ the/these way(s)​ is/are

​two; borrowing by issuing bonds and printing money.

Suppose that velocity is 3 and the money supply is​ $600 million. According to the quantity theory of​ money, nominal output equals

$1.8 billion

Suppose a bank has​ $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 5 percent. If the Federal Reserve lowers the required reserve ratio to 3​ percent, then the bank will now have excess reserves of

$2,000

Using the following information what is the velocity of​ money? Component-Value: Money Supply - $1,900 Price Level - 1.74 Real GDP - $12,000 The velocity of money is equal​ to: ______ ​(enter your answer rounded to two decimal places​).

10.99

If the money supply is growing at a rate of 5 percent per​ year, real GDP​ (real output) is growing at a rate of 1 percent per​ year, and velocity is​ constant, what will the inflation rate​ be?

4%

If the money supply is growing at a rate of 5 percent per​ year, real GDP​ (real output) is growing at a rate of 1 percent per​ year, and velocity is growing at 3 percent per year instead of remaining​ constant, what will the inflation rate​ be?

7%

In an article in the American Free Press​, Professor Peter Spencer of York University in England is quoted as​ saying: ​"This printing of money​ 'will keep the​ [deflation] wolf from the​ door'." In the same​ article, Ambrose​ Evans-Pritchard, a writer for the​ London-based newspaper The Telegraph​, is quoted as​ saying: ​"Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a​ grip, it can gradually set off a​ self-feeding spiral that is hard to​ stop." ​Source: Doug​ French, "We Should Celebrate Price​ Deflation," American Free Press​, November​ 17, 2008. ->What is price​ deflation? ->What is meant by Professor​ Spencer's statement​ "This printing of money​ 'will keep the​ [deflation] wolf from the​ door'"? ->Why would deflation cause​ "shoppers to hold​ back," and what does​ Evans-Pritchard mean when he​ says, "Once this psychology gains a​ grip, it can gradually set off a​ self-feeding spiral that is hard to​ stop"?

A fall in the price level. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level. Consumers delay​ purchases, expecting prices to fall​ more, and the lack of demand causes prices to fall further

If Irving Fisher was correct in his prediction about the value of​ velocity, then the quantity equation can be written to solve for the inflation rate as​ follows:

Inflation rate​ = Growth rate of the money supply - Growth rate of real output.

Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the money​ supply?

decrease the interest rate it pays on reserves

Very high rates of inflation are called

hyperinflation

There is a strong link between changes in the money supply and inflation

in the long run

The quantity equation states that the

money supply times the velocity of money equals the price level times real output.

According to the quantity theory of​ money, if velocity does not​ change, when the money supply of a country​ increases, what will​ occur?

nominal GDP will increase


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