...Question 1 a) (i) Money facilitates transactions of goods and service as a medium of exchange. (ii) Measurement of value; The value of various goods and services are expressed in terms of money such as $10 per meter, etc. having facilitated modern business and trade. (iii) Store of value; People can store surplus purchasing power and use it whenever they want. (iv) Money is the most liquid asset (Liquidity measures how easily assets can be spent to buy goods and services). B) The quantity equation is the quantity of money (M) times the velocity of circulation of money (V) equals to the dollar value (P) times the economy’s output of goods and services (Y)( M x V = P x Y). An increase in the quantity of money must be reflected in changes in one of the other three variables. This is a long run theory. The theory assumes that the velocity of money (V) and output (Y) are very stable over time. Money neutrality means that “the changes in the money supply do not affect real variables” (Gans, et al., 2012). The absolute price level is a nominal variable while relative prices are real variables. Plus a change in the price level only affects absolute prices and a change in the money supply (a nominal variable) can only affect other nominal variables (the price level) rather than real variables(production, employment etc). Therefore if the price level is low, the value of money is high, then people will demand to hold less money while if the price level is high, the value of money is low, then...
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...CHAPTER 5. FLEXIBLE PRICES: THE MONETARY MODEL The monetary approach was the earliest approach to explain the related phenomena of exchange rate variations, on the other hand, and the BOP, in the other. While it is completely inadequate in explaining the wild day-to-day, month-to-month gyrations seen in recent years, it nonetheless provides some useful insights into the broader picture of long run trends. It consists of two basic building blocks: PPP and demand for money. 5.1 The Simple Monetary Model of a Floating Exchange Rate 5.1.1 The Setting: a. AS is vertical This does not imply that output is constant. It can only vary as the result of a change in the productivity of the economy: accumulation of capital, growth in the labor force or its educational level, etc.. And a vertical AS curve presupposes perfect price flexibility in all markets. b. The demand for real money balances is a stable function of only a few domestic macroeconomic variables. In fact, for the moment and till further notice, we shall work with the Cambridge quantity equation provided below: Md = kPy k > 0 Given a money stock, MS0, equilibrium means: MS0 = Md = kPy = kY The figure below shows that the fall in the price level is of the same proportion as the rise in income as we move from A to D. However, a change in MS would shift AD curve. AD curve will shift upward and to the right when there is an increase in MS. At point B, P1 must be greater than P0 by the same proportion...
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...value of money is determined by the demand for money (Md) and the supply of money (Ms) The price level is a measure of the value of money. A rise in the price level means a lower value of money and a fall in the price level means a higher value of money. When there is higher inflation, the price level will change fast and unit of account will also change and vice versa. According to the article, post-Tet, demand in rice market declined, thus people spent less money to buy rice. Therefore, there is a decrease in money supply. Based on the article, before Tet holiday, 21.027 VND (Vietnam Dong) can exchange to US $1. However, in March, post- Tet, Vietnamese just needs 20.943 VND to exchange to US $1. Hence, the value of VND is higher. (Vietnam Index fells 0.4% which means 20.943 + (20.943*0.4%) = 21.027VND) The inflation rate decreases which leads to the price level change slowly. The price fell 0.19% after Tet holiday. There is a decrease in money supply that shifts the money supply curve to the left (Ms1 to Ms2). Quantity of money demanded (Q1) is larger than quantity of money supplied (Q2). Therefore, there is a shortage of money at the initial price level (P1) equals to CA in the graph above. The decreases the demand for rice as people is short of money with them. This decreases the price level (fall 0.19%) and raises the value of money (21.027 VND declined to 20.943 VND). The decrease in price level from P1 to P2 in turn decreases the quantity of money demanded...
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...PRE-TEST – ANSWER KEY Econ 361, 1st Hourly Prof. Khan Mohabbat 1. The broadest measure of the aggregate price level is the a) GDP deflator.* b) consumer price index. c) producer price index. d) d. gross domestic product. 2. If the value of a price index was 125 for 2005 and 75 for 1982, and GDP was 2500 in 2005 compared to 600 in 1982, the value of real 2005 GDP in terms of 1982 prices is a) 1500.* b) 1000. c) 2500. d) 360. 3. The index that measures the change in price of a typical basket of consumer goods is a) the GDP deflator. b) the consumer price index.* c) nominal GDP. d) real GDP. 4. Personal income equals personal disposable income plus a) payroll taxes. b) transfer payments. c) dividend payments. d) personal saving. e) personal taxes.* 5. If real GDP exceeds potential GDP, this means that a) output is below the level produced at the benchmark rate for high employment and high rate of resource utilization. b) this cannot occur; the economy can never be at a point where real GDP exceeds potential GDP. c) cyclical output is above what the economy can sustain in the long-run.* d) the economy is expanding. 6. In the base year, the relationship between nominal and real GDP is a) uncertain. b) one of equality.* c) real GDP is higher. d) nominal GDP is higher. 1 7. Gross domestic product includes a) all intermediate and final goods and services produced. b) the current production of final goods and services with a country’s borders.* c) exchanges of assets. d) the...
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...Principles of Macroeconomics, 9e - TB1 (Case/Fair/Oster) Chapter 18 Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics 18.1 Keynesian Economics 1 Multiple Choice 1) Who wrote the General Theory of Employment, Interest, and Money? A) Adam Smith B) David Ricardo C) Milton Friedman D) John Maynard Keynes Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 2) Keynesian economics includes the idea that A) economic policies are ineffective. B) the economy is basically stable. C) prices adjust to clear the markets. D) labor markets don't always clear due to wage rigidities. Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 3) Among the propositions of the Keynesian school of thought is A) economic policies are ineffective. B) aggregate supply management is the key to a stable economy. C) aggregate demand determines equilibrium output. D) rational expectations. Answer: C Diff: 1 Topic: Keynesian Economics Skill: Fact 4) Keynes believed which of the following? A) The government has a role to play in fighting inflation, but not in fighting unemployment. B) The government has a role to play in fighting unemployment, but not in fighting inflation. ...
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...7 [ Inflation] 1. Inflation - Inflation is a continuing rise in the price level, which causes money to lose value. - Inflation is a rise in the price level, not in the price of a particular commodity. - It is ongoing, not a-onetime-only increase in the price level. - The inflation rate is the percentage change in the price level. It is calculated as the following: Current price level – Last year's price level x 100 Last year's price level 2. Demand-Pull inflation - Demand pull inflation is caused by an increase in aggregate demand. - An increase in consumption or investment or government expenditures or exports or the quantity of money → increases the aggregate demand. - A decrease in imports or taxes or interest rates → increases the aggregate demand Initial effect of an increase in aggregate demand: Price level LAS SAS The increase in demand raises the price level from 110 to 120 120 110 AD1 AD0 Real GDP Money wage rate response Price level LAS SAS1 130 ...
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...Homework Week 6 Answers The homework is worth 20 points, so each answer will have points distribution at the instructor’s discretion. Chapter 14 1. a. Given that the interest rate has been 4 percent for the last ten quarters, then for IS curve I, real GDP equals 8,800 − 25(4) − 25(4) − 25(4) − 25(4) − 20(4) − 20(4) − 20(4) − 15(4) − 15(4) − 10(4) = 8,000. For IS curve II, real GDP equals 8,400 − 5(4) − 5(4) − 5(4) − 5(4) − 10(4) − 15(4) − 15(4) − 15(4) − 20(4) = 8,000. b. For IS curve I, real GDP in the first quarter equals 8,800 − 25(3) − 25(4) − 25(4) − 25(4) − 20(4) − 20(4) − 20(4) − 15(4) − 15(4) − 10(4) = 8,025. Using the same IS curve, it is easy to show that for quarters two through ten, real GDP equals 8,050, 8,075, 8,100, 8,120, 8,140, 8,160, 8,175, 8,190, and 8,200, respectively. For IS curve II, real GDP in the first quarter equals 8,400 − 5(3) − 5(4) − 5(4) − 5(4) − 5(4) − 10(4) − 15(4) − 15(4) − 15(4) − 20(4) = 8,005. Using the same IS curve, it is easy to show that for quarters two through ten, real GDP equals 8,010, 8,015, 8,020, 8,025, 8,035, 8,050, 8,065, 8,080, and 8,100, respectively. c. Real GDP increases by 200 billion for IS curve I. The increase in real GDP for IS curve II equals 100 billion. d. For IS curve I, it takes four quarters, or twelve months, for real GDP to increase by 100 billion or one-half of the total increase in real GDP. For IS curve II, it takes seven quarters, or twenty-one months, for real GDP to increase by 50 billion...
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...Such national statistics would be ideal for: 1) Making International Comparisons: In doing this it is necessary to convert the figures to same currency using a rate of exchange. 2) Government Planning: A rising real national income with a fairly constant capital stock will generally be associated with a fall in unemployment. Similarly, there is likely to be direct relationship between the level of real national income and the rate of inflation. As the equilibrium level of national income reaches the full employment level of national income, so inflationary pressure is likely to build up in the economy. To devise appropriate government policies, to combat unemployment and inflation and to estimate the effects of such policies, accurate national income statistics are essential. 3) Formulating macroeconomic policy. 4) The aggregate model is needed to explain why prices in general rise or fall. 5) Explaining what determines changes in the level of aggregate output Aggregate Demand * This is the total quantity of output demanded at alternative price levels in a given time period, “ceteris paribus”. * Our view here encompasses the collective demand for all goods and services rather than the demand for any single good. * It therefore consists of demand of local consumers, firms, the government and foreigners in the case of open economy. That is QD = C + I + G +DX, where DX is export demand, C is local consumers, I is investment and QD is aggregate...
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...Microeconomics 1. The Basics of Supply and Demand (Pindyck – Chapter 2): Excercises 9, 10 (page 63). Excercises 9: a) The original demand is QD =18-3P And supply is QS =-6+9P The 20-percent increase in demand means that the new demand is 120 percent of the original demand, so the new demand is Q ́D =1.2QD Q ́D =1.2(18–3P)=21.6–3.6P. The new equilibrium is where Q ́D equals the original supply: 21.6 – 3.6P = - 6 + 9P The new equilibrium price is P* = $2.19 per pound. An increase in demand of 20 percent, therefore, increases price by 19 cents per pound, or 9.5 percent. b) Using the new price of $2.19 in the supply curve, the new equilibrium quantity is Q* = - 6 + 9(2.19) = 13.71 million metric tons /year, an increase of 1.71 million metric tons/ year. c) The new supply of copper falls (shifts to the left) to 80 percent of the original, so Q ́S = 0.8QS = 0.8(-6 + 9P) = - 4.8 + 7.2P. The new equilibrium is where Q ́D = Q ́S. 21.6 – 3.6P = - 4.8 + 7.2P. The new equilibrium price is P* = $2.44 per pound. Plugging this price into the new supply equation, the new equilibrium quantity is: Q* = 4.8 + 7.2(2.44) = 12.77 million metric tons/ year. Exercise 10: a) The competitive (non-OPEC) quantity supplied is Sc = Q* = 20. The general form for the linear competitive supply equation is SC = c + dP. the short-run supply elasticity as ES = d(P*/Q*) where d is the slope of the supply function. Since ES = 0.10, P* = $50, and Q* = 20, 0.10 = d(50/20). d = 0.04. Substituting...
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...Quantity theory of money (QTM) – suggests that the demand for real money balances is proportional to income. Quantity eqn.: MxV=PxT where M – money supply; V – velocity of money: the # of times a PhP bill changes hands for time, t; P – price level; and, T – transactions. 1 13/10/2015 Income (Y) version of the QE: MxV=PxY ◦ where V: the # of times a PhP bill enters someone’s income; ◦ P x Y: nominal GDP. This version of the QTM is used since it is difficult to observe transactions. Money Demand & the Quantity Theory of Money: uses real money balances to measure the purchasing power of the stock of money; the money demand function is like the demand function for a particular good, i.e. the convenience of holding real money balances; 2 13/10/2015 Money demand function below shows that the quantity of real money balances demanded is proportional to real income; M P D kY There is an inverse relationship between V & k: M x V = P x Y if V=1/k This implies that when: (M/P)D is high, k is large, V is small: money changes hands less; OR, (M/P)D is low, k is small, V is large: money changes hands more. 3 13/10/2015 Velocity (V) & the QTM: M x V = P x Y If V, is assumed to be constant, QTM explains what determines nominal GDP; A change in M leads to a change in nominal GDP, thus, if V is fixed, the quantity of money determines the...
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...rise in the general price level. For the expansion of the early universe, see Inflation (cosmology). For other uses, see Inflation (disambiguation). Economics 2011 World GDP (PPP) per capita by country 2012 World GDP (PPP) per capita by country Index Outline Category History Types Classification History of economics Economic history (academic study) Schools of economics Microeconomics Macroeconomics Heterodox economics Methodology JEL classification codes Theory Techniques Econometrics Economic growth Economic system Experimental Mathematical Game theory National accounting By application Agricultural Behavioral Business Computational Cultural Demographic Development Ecological Education Environmental Evolutionary Expeditionary Geography Health Industrial organization Information International Labour Law Managerial Monetary / Financial Natural resource Personnel Public / Welfare economics Regional Rural Urban Welfare Lists Economists Publications (journals) Portal icon Business and economics portal v t e In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.[2][3] A chief measure of price inflation is the inflation...
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...Jahangirnagar University Institute of Business Administration Essay On The Standard Supply & Demand Model and The Aggregate Supply & Demand Model Course: BUS 209-Macroeconomics Submitted to: Dr. Shuddhasattwa Rafiq Director and Associate Professor Institute of Business Administration Jahangirnagar University Submitted by: Md. Nahid Alam Class ID: 2368 (21st batch) Institute of Business Administration Jahangirnagar University Date of Submission: 11-06-2013 Essay On The Standard Supply & Demand Model and The Aggregate Supply & Demand Model June 11, 2013 Dr. Shuddhasattwa Rafiq Director and Associate Professor Institute of Business Administration Jahangirnagar University Savar, Dhaka-1342. Subject: Essay Submission. Sir It’s my immense pleasure to submit the essay on “The Standard Supply & Demand Model and The Aggregate Supply & Demand Model” that you have assigned me at the beginning of this semester. Submitting this essay is the partial fulfillment of this particular course. I believe that this essay will help to understand supply and demand, how supply and demand curves derive in microeconomics & macroeconomics and what determines the slopes of supply and demand curves. Thank you for giving the opportunity to prepare this report. It was really a wonderful experience. I hope you find this essay satisfactory. Sincerely, ------------------------- TABLE OF CONTENTS Context Name | Page...
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... 1 Unanticipated or Unexpected Price Level Changes Shafonia Johnson Grantham University Running head: UNANTICIPATED OR UNEXPECTED 2 Unanticipated or Unexpected Price Level Changes The three reasons a lower price level leads to an increase of goods and services are an increase in the purchasing power of money, reduction in the demand for money and lower real interest rate and the making domestic produced goods less expensive (Gwartney, Stroup, Sobel & Macpherson,, 2013, p. 177). With an unexpected 3 percent fall in the price level in the goods and services market consumers’ money will increase in purchase power. Consumers will have the opportunity to purchase more and be wealthier. This is with the assumption that “the supply of money is fixed” (Gwartney, et al, 2013, p. 177). Therefore, this power will enable the purchase of more goods and services. The lower price level reduces the demand for money and lowers interest rates. Allowing consumers and businesses to have a smaller amount of money in the bank and still have everything they need. In retrospect businesses will need less money to sustain employee wages, pay taxes and any other business needs. This lower price level gives better opportunity to obtain assets that have high returns. Consumers will be able to purchase...
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...Inflation is not a random increase in the general price level. Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply side factors) . Economists divide the causes into three main categories. 1. Cost-push Inflation: Cost-push inflation occurs when the price level is pushed up by increases in the costs of production. If firms face higher costs, they will usually raise their prices to maintain their profit margins. Higher production costs led to a decrease in aggregate supply and an increase in the overall price level because the equilibrium point moved. There are a number of reasons for an increase in costs. 1) One is wages increasing more than labour productivity. This will increase labour costs. As labour costs form the highest proportion of total costs in many firms, such a rise can have a significant impact on the price level. It will also not be a one-off increase. The initial rise in the price level is likely to cause workers to press for even higher wages, leading to a wage-price spiral. The sharp rise in the price of imported oil during the 1970s provides a typical example of cost-push inflation. Rising energy prices caused the cost of producing and transporting goods to rise. Higher production costs led to a decrease in aggregate supply and an increase in the overall price level because the equilibrium point moved 2) Another important...
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... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5 6 6 6 6 7 7 8 11 15 15 15 17 19 20 20 21 22 22 22 23 23 23 24 25 26 31 31 33 34 35 35 38 40 40 43 47 47 47 48 48 48 2 Microeconomics Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . The Demand Schedule . . . . . . . . . . . . . . . . . . . . The Supply Schedule . . . . . . . . . . . . . . . . . . . . . Equilibrium of Supply and Demand . . . . . . . . . . . . . Elasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The price elasticity of demand . . . . . . . . . . . . . . . . The income elasticity of demand . . . . . . . . . . . . . . . The cross-price elasticity of demand . . . . . . . . . . . . . The price elasticity of supply . . . . . . . . . . . . . . . . . Elasticity is not the same as slope . . . . . . . . . ....
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