Chapter 19 Homework Help Save &Ext; Suppose that the money supply and the nomina
ID: 1111210 • Letter: C
Question
Chapter 19 Homework Help Save &Ext; Suppose that the money supply and the nominal G 5 DP for a hypothetical economy are $96 bilion and $336 bilion, respectively ructions: In part a round your answer to 1 decimal place. In part c enter your answer as a whole number. a. What is the velocity of money? 10 points b. How will households and businesses react if the central bank reduces the money supply by $20 billion? Households and businesses will increase spending Households and businesses will not react. ° Households and businesses will reduce spending. c. By how much will nominal GOP have to fall to restore equiibrium, according to the monetarist perspective?Explanation / Answer
The nominal GDP= $336 billion
Money supply = $96 billion
(a)
The velocity of the money = Nominal GDP / Money supply
= $336 billion/$96 bilion
=3.5 times.
(b)
If the Central bank reduces the money supply by $20 billion, then household and businesses reduce spending because they have now less money on hand for spending.
Hence option Third is the correct answer.
(c) Since money supply has been reduced by $20 billion Central in the economy, so for restoring equilibrium in the economy, the nominal GDP must fall by = Velocity of money * reduction in money supply
=3.5 * 20 billions.
= $70 billions.
Therefore for restoring equilibrium in the economy, the nominal GDP must fall by $70 billion.
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