Author Question: According to monetary theory, if the money supply is growing at a rate of 5 percent, real GDP is ... (Read 102 times)

aabwk4 · **on:** Jun 29, 2018

According to monetary theory, if the money supply is growing at a rate of 5 percent, real GDP is growing at a rate of 2 percent, and velocity is constant, what will the inflation rate be?

What will be an ideal response?

Question 2

Larry Krovitz is a salesman who works at a used-car showroom in Sydney, Australia. It's the last week of July but he is yet to meet his sales target for the month. A customer, Harold Kumar, who wants to buy a Ford Fiesta, walks in to the showroom.

After taking one of the cars for a test drive, Harold decides to buy it. While 11,000 was the least that Larry would have been willing to accept for that car, he quotes a price of 15,000 . After some bargaining, the car is sold for 12,000 . a. What is the producer surplus in this case? b. If Larry bought the car for 8,000, what is his profit? c. Is producer surplus always equal to profit? Explain your answer.

SAUXC · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Using the growth rate version of the quantity equation, we have:
growth rate of the price level (or 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:
growth rate of the price level (or inflation rate) = growth rate of money - growth rate of output.
Substituting in our values:
growth rate of the price level (or inflation rate) = 5 percent - 2 percent = 3 percent.

Answer to Question 2

a. The producer surplus is the economic surplus gained in the market, calculated as the difference between a seller's supply curve and the price the consumer pays. In this case, 11,000 is the price represented by Larry's supply curve, since that is the minimum he would want in order to sell the car. Since he gets 12,000 for the car, his producer surplus is 12,000 11,000 = 1,000 .
b. Larry's profit is the difference between Larry's revenues and costs. This is equal to 12,000 8,000 = 4,000 .
c. For a single unit of a good, profit is the difference between the price and the average total cost. Producer surplus, on the other hand, is the difference between the seller's supply curve and the price that the consumer pays. Since the supply curve in a competitive market is the upward-rising portion of the marginal cost curve, producer surplus is the difference between the marginal cost and the price. This would mean that producer surplus is equal to profit when marginal cost is equal to average cost.