Answer Happy

a) [5 marks] In the context of the Quantitative Theory of Money comment on the
following sentence: "In order for inflation to be constant, the growth rate of the money
supply should be equal to the growth rate of real output"
(b) Write down the "Fisher Equation" and explain the Fisher effect.
(c) Suppose that the velocity of money is not constant, and it is related to the
nominal interest rate, such that the velocity is a function of the nominal interest rate:
Vi). Explain how the velocity of money would change when the nominal interest
changes.
(d) Consider the equilibrium in the money market is given by M/P=L(Y,i),
where M denotes the money supply, P the fixed aggregate price level, i denotes the
nominal interest rate and Y aggregate real income. Suppose that the money market
starts at the equilibrium. Now assume that money supply is increased (everything else
constant). Using a diagram to illustrate your answer, explain how the interest rate
adjusts to maintain the money market equilibrium in the context of the "theory of
liquidity preference"
(e) [4 marks] Suppose we are in the long run and the aggregate price level is flexible.
Using the Fisher question in the money market equilibrium condition M/P=L(Y,i), as
in (c), explain how an increase in expected inflation (everything else constant) will
affect the aggregate price level.
Answer all parts (a) (e) of this question. (a) [5 marks] In the context of the Quantitative Theory of Money comment on the following sentence: "In order for inflation to be constant, the growth rate of the money supply should be equal to the growth rate of real output". (b) [3 marks] Write down the "Fisher Equation" and explain the Fisher effect. (c) (5 marks) Suppose that the velocity of money is not constant, and it is related to the nominal interest rate, such that the velocity is a function of the nominal interest rate: VO) Explain how the velocity of money would change when the nominal interest changes. (d) [8 marks] Consider the equilibrium in the money market is given by M/P-L(YJ), where M denotes the money supply, P the fixed aggregate price level, i denotes the nominal interest rate and Y aggregate real income. Suppose that the money market starts at the equilibrium. Now assame that money supply is increased (everything else constant). Using a diagram to illustrate your answer, explain how the interest rate adjusts to maintain the money market equilibrium in the context of the "theory of liquidity preference". (e) [4 marks] Suppose we are in the long run and the aggregate price level is flexible. Using the Fisher question in the money market equilibrium condition M/P-LCY.), as in (c), explain how an increase in expected inflation (everything else constant) will affect the aggregate price level.
2. Answer all parts (a)-(e) of this question. (a) [5 marks] In the context of the Quantitative Theory of Money comment on the following sentence: "th order for inflation to be constant, the growth rate of the money supply should be equal to the growth rate of real output". (b) [3 marks] Write down the "Fisher Equation" and explain the Fisher effect. (c) [5 marks] Suppose that the velocity of money is not constant, and it is related to the nominal interest rate, such that the velocity is a function of the nominal interest rate: V(i). Explain how the velocity of money would change when the nominal interest changes. (d) [8 marks] Consider the equilibrium in the money market is given by M/P-L(Y,i), where M denotes the money supply, P the fixed aggregate price level, i denotes the nominal interest rate and Y aggregate real income. Suppose that the money market starts at the equilibrium. Now assume that money supply is increased (everything else constant). Using a diagram to illustrate your answer, explain how the interest rate adjusts to maintain the money market equilibrium in the context of the "theory of liquidity preference". (e) [4 marks] Suppose we are in the long run and the aggregate price level is flexible. Using the Fisher question in the money market equilibrium condition M/P-L(Y,i), as in (c), explain how an increase in expected inflation (everything else constant) will affect the aggregate price level.