mberline21

Consider the following demand equation for money.

(M/P)^d = kY

a) In words, explain what the velocity of money is.

b) Let the supply of (real) money be given by M/P. Using the money demand equation, solve for the velocity of money.

c) Suppose that real GDP is expected to grow 3% over the next year and k is constant. What is the expected rate of inflation if the Fed holds the money supply constant?

d) Suppose that the Fed (Federal Reserve) targets inflation to be 2% over the coming year. What should be the targeted growth rate of the money supply?

e) Suppose that growth in real GDP ends up being 1%. Assuming the Fed carries out its open market operations, expecting a growth rate of 3%, what will happen to the rate of inflation?

f) Is there reason to think that demand for money should be a function of the nominal interest rate? Why?

g) Modify the money demand equation that is given to include the nominal interest rate.

Suppose the country is experiencing a prolonged period of economic growth, what would you expect to happen to the demand for money and why? If the Fed chooses not to accommodate this change in the demand for money by increasing the money supply, what would you expect to happen to interest rates and what impact would that have on economic growth?

1. When interest rates (IRs) decrease, how might businesses and consumers change their economic behavior?

2. If there is a decline in the money growth, what might you expect to happen to real GDP (real output) and inflation rate?

3. Is everybody worse-off when IRs rise?

4. Why do managers of financial institutions care so much about FED

Define internal economies of scale and explain the effect of international trade in industries characterized by internal economies of scale.

Briefly describe the pattern of trade (who exports and who imports a product) based on:

1) In industries characterized by external economies of scale.

2) In industries characterized by internal economies of scale.

How might managers interpret the potential for their product in a market that is, in absolute economic terms, large but, on a per capita basis, characterized by a majority of poor consumers?