Textbook Notes (270,000)
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Chapter

ECON 1BB3 Chapter Notes -Demand For Money, Money Supply, Savings Account


Department
Economics
Course Code
ECON 1BB3
Professor
Bridget O' Shaughnessy

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CHAPTER 11 HOMEWORK ANSWERS
1. a. P = 2
V = 20
b.
5?00 +=+
Δ
+
Δ
=
Δ
+
Δ
×=×
Y
Y
P
P
V
V
M
M
Y
P
V
M
Since the left hand side must equal the right hand side, nominal GDP (P*Y) will
not change. Prices will fall by 5%.
c. YPVM ×=×
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. YPVM ×=×
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 =
$575billion.
2. a. Money demand will decrease.
b. The price level will rise as (1/P) falls.
1/P
M
Md
1/P2
M1
Ms
1/P1Md
c. If the Bank of Canada decreases the money supply, the price level will remain
constant.
1/P
M
Md
1/P2
M1
Ms
1/P1Md
Ms
M2
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