a.suppose that the nominal quatity of money,M, doubles once and for all the rise
ID: 1209156 • Letter: A
Question
a.suppose that the nominal quatity of money,M, doubles once and for all
the rise in the price level P, suggests that workers will be worse off. is this correct? the rise in the nominal wage rate, w, suggests that workers will be better off. is this right? how do your results relate to the concept of the neutrality of money?
b. explain why a favorable shock to the production function tends to reduce the price level, P, How could the monetary authority prevent this fall in P?
c. explain why it is important to distinguish between shifts in the nominal quantity of money, M, and shifts in the nominal demand for money, M^d, what association would we expect between the price level, P, and real GDP, Y for periods in which both types of monetary shifts occurred?
Explanation / Answer
Answer. If the nominal money supply and pric level doubles, then the real money supply remains constant. However, increase in price level, causes real wage to fall. If the nominal wage rate and price level increases with same rate then real wage rate remains constant. If the increase in nominal wage rate is less than the increase in price level, then the real wage will fall and workers will be worse off.
A favorable supply shock shifts the production function upward and reduces the cost of production and causes the firm to produce more output. As the cost of production falls, the price of goods and services also falls. The overall impact will be fall in price level and increase in output level. The monetary authority prevent the fall in Price level by expanding the money supply by the same amount of fall in price level. Thus, keeping price level constant.
Money demand has a negative relation with the interest rates. A increase in interest rates reduces the demand for money and vice versa. While money supply is determined through actions of central bank and it is independent of interest rates. The money demand curve is downward sloping whereas the money supply curve is parallel to y axis (vertical). A rise in money demand causes money demand curve to shift right and increases the interest rates. While an increase in money supply causes the money supply curve to shift right and reduces the interest rates.
Higher the price level, lower will be the real gdp and lower the price level, higher will be real gdp.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.