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Chapter

This

**preview**shows half of the first page. to view the full**2 pages of the document.**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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