CHAPTER 11 HOMEWORK ANSWERS
1. a. P = 2
M × =P ×
ΔM ΔV ΔP ΔY
+ = +
M V P Y
0+ 0 = ?+5
Since the left hand side must equal the right hand side, nominal GDP (P*Y) will
not change. Prices will fall by 5%.
c. M ×V = P×Y
If V is constant and Y is growing at 5% per year, then in order to keep P constant,
the Fed should increase M by 5%. This means setting M = $525billion.
d. M ×V = P×Y
If V is constant and Y is growing at 5% per year, then in order to have an increase
in P equal to 10%, the Fed should increase M by 15%. This means setting M =
2. a. Money demand will decrease.
b. The price level will rise as (1/P) falls.
1/P M s
c. If the Bank of Canada decreases the money supply, the price level will remain
1/P s s