This topic contains a solution. Click here to go to the answer

Author Question: Suppose real GDP is currently 12.5 trillion and potential real GDP is 13 trillion. If the president ... (Read 152 times)

leilurhhh

  • Hero Member
  • *****
  • Posts: 560
Suppose real GDP is currently 12.5 trillion and potential real GDP is 13 trillion. If the president and Congress increased government purchases by 500 billion, what would be the result on the economy?
 
  What will be an ideal response?

Question 2

What are the implications of the quantity theory of money for monetary policy and price stability?
 
  What will be an ideal response?



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

cam1229

  • Sr. Member
  • ****
  • Posts: 329
Answer to Question 1

The economy would go from a short-run equilibrium below potential GDP to a short-run equilibrium above potential GDP. The increase in government purchases, which equals the shortfall in real GDP from potential real GDP, is too large. The increase in government purchases needs to be less than the shortfall in real GDP because of the multiplier effect.

Answer to Question 2

If one assumes that the velocity of money is constant, there are clear implications on how to use monetary policy for price stability. If we transform the quantity equation, MV = PY, into an equation about growth rate for these variables, then the quantity equation becomes:
growth rate of money + growth rate of velocity = growth rate in prices (inflation rate) + growth rate of real output.

Rearranging, we get:
inflation rate = growth rate of money + growth rate of velocity - growth rate of real output. If velocity does not change, then the growth rate of velocity is zero. Then, inflation is determined by:
growth rate of money - growth rate of output. As long as money does not grow faster than real output, inflation will not occur. If the supply of money grows faster than the growth of real output, the result will be inflation.




leilurhhh

  • Member
  • Posts: 560
Reply 2 on: Jun 29, 2018
Gracias!


Laurenleakan

  • Member
  • Posts: 309
Reply 3 on: Yesterday
Excellent

 

Did you know?

About 600,000 particles of skin are shed every hour by each human. If you live to age 70 years, you have shed 105 pounds of dead skin.

Did you know?

Carbamazepine can interfere with the results of home pregnancy tests. If you are taking carbamazepine, do not try to test for pregnancy at home.

Did you know?

Adults are resistant to the bacterium that causes Botulism. These bacteria thrive in honey – therefore, honey should never be given to infants since their immune systems are not yet resistant.

Did you know?

The first documented use of surgical anesthesia in the United States was in Connecticut in 1844.

Did you know?

The first-known contraceptive was crocodile dung, used in Egypt in 2000 BC. Condoms were also reportedly used, made of animal bladders or intestines.

For a complete list of videos, visit our video library