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1. If the present inflation rate is 5% and the existing nominal interest rate is 10%, holding other things constant, what do you expect to happen (according to the Fisher effect) to the nominal interest rate if inflation falls to 2%?
2. If the quantity of money increases by 10%, while money velocity and production stay constant, what has to happen to the price level according to the quantity equation?
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- The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year. a) What happens to prices? b) What happens to nominal interest rate? c) Why might the government be doing this?Suppose a country has a money demand function (M/P)ª = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What is its relationship to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
- b. Suppose a country has a money demand function (M/P)d= kỲ, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?Explain the quantity theory of money and explain how the money demand, money supply, and quantity of money are related to each other? Which variable (s) will be affected if the money supply increases in the economy? Take in context to what has been happening in the U.S economy in the past few years.Suppose that the money supply increases by 20 percent. If there is no inflation, what does the quantity theory of money tell us must happen to real GDP? (Assume that the velocity of money is constant.) Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a It must increase by more than 20% It must increase by less than 20% C It stays the same d. It must increase by 20%
- Assume that the nominal interest rate is 8% in 2020, with inflation at 3%. a. According to the Fisher effect, what will happen to the nominal interest rate if inflation goes to 8%? b. If someone borrowed $1 million in 2020 at 8% (promising to pay $1,080,000 in one year) and paid back the loan one year later when inflation had unexpectedly gone to 8%, what would be the real interest rate on this loan?Suppose the inflation rate is zero, the income elasticity of money demand is 0.75, and the interest elasticity of money demand is -0.25. Determine the inflation rate that results from each of the following events (starting back at zero for each one). Enter all answers as integers with no decimal places. If negative, be sure to include the minus sign before the number (no spaces). iv. Nominal money supply increases 5% and the interest rate rises from 5% to 10%.The inflation rate is now %? v. Nominal money supply increases 3%, the interest rate rises from 3% to 6%, and real income increases 16%. The inflation rate is now %?Economics Suppose that the income elasticity of money demand is 0.4. Nominal interest rates do not change over time. If money supply increases by 20% every year, while real income only increases by 1%, what is the inflation rate?
- 1. Inflation can cause increased wealth inequality through the Cantillion Effect. Essentially, this means that expansionary monetary policy benefits those who are initially given new money (usually those who are rich and well-connected), while the rest of the population suffers the effects of inflation. Using the quantity theory of money, explain why this is the case.case. 2. Assume that the economy has an annual inflation rate of 5 percent. Are the following investments profitable in real terms? You do not need to explain your answert. (a) The spot price of silver is $31 per ounce. You purchase 50 ounces of silver for $1,600, in order to compensate the merchant. Over the year, the spot price of silver rises to $34 per ounce, and you are able to sell the silver you have at the spot price. (b) You purchase a Non-Fungible Token (NFT) for $98 million. The following year, you are able to sell it for $102.5 million 3. Why does the 'inflation tax' transfer resources from working people to…Empirical evidence that substantiates the Quantity theory includes which of the following? Select one or more: a. Countries with high rates of inflation over many years have high rates of growth of the money supply. b. In the US each year, the increase in the money supply is within a small margin of the increase in prices that year. c. Countries with high rates of inflation over many years have high rates of growth of real GDP. d. Countries with independent central banks tend to have high rates of inflation.If the quantity of money grows at 7 percent a year, the velocity of circulation is constant, and real GDP grows at 6 percent a year, what is the inflation rate? The inflation rate is ____ percent a year Thank you
