Question
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.
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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