Q4.

Supposeaneconomyhasenoughlabor,capital,andlandtoproduce1,000applesperyear.Applesarethe onlyproductoftheeconomyandthepriceis$10perapple.In 2019,moneysupplyis$5,000andvelocityofmoneyisconstant.

a.Statethequantitytheoryofmoney.(3marks)

b.ComputenominalGDPandvelocityofmoneyin2019. (4marks)

In2020,thecentralbankoftheeconomyincreasesthemoneysupplyby10%.

c.ComputenominalGDPandpricelevelin2020.What is theinflationratebetween2019and 2020? (4marks)

d.Accordingto theFishereffect,

i.howarenominalandrealinterestratesrelatedtooneanother?(2marks)

ii.whatwillbetheimpactoftheincreaseinmoneysupply by10%onnominaland

realinterestratesrespectively?(2marks)

Question 5 (16 marks)

Suppose thatEconomyAisinthelong-runequilibriuminitially.

a.Copy thefollowingdiagramtoyouranswerbook.Labelthex-axisandy-axisappropriatelyforthefollowingdiagram.Addthelong-runaggregatesupplycurve(LRAS)onthediagramtoillustratethecurrentstateofEconomyA.Labelthefull-employment output(YN)onthediagram.(whereAD=aggregatedemandandSRAS=short-runaggregatesupply)(3marks)

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