Mr. Taylor states in his will that his $50,000 portfolio of bank CD's will go to his only son. Upon Mr. Taylor's death, the son sells the CD's and invests the proceeds in a stock mutual fund. How does this immediately impact M2 and the effective amount money available for transactions?
Answer(s): F
Prior to Mr. Taylor's death, the CD's were counted as part of M2. In addition, this money was not used for current consumption. After the sale of the CD's, the money is still not being used for current consumption, but it is now not counted as part of M2. The real level of money in circulation has not changed here, but the measure of the money supply has decreased. This is an example of a distortion of money supply measures.
Given the information below, during which quarters does real income decline? Nominal GDP GDP DeflatorQ 0 (base) 981100Q 1 993101Q 2 1,001106Q 3 1,042111Q 4 1,040107
Answer(s): C
Real income is measure by real GDP. The first step in this problem is to calculate real GDP in each period by multiplying nominal GDP by the base GDP deflator and then dividing by the current GDP deflator. The result is as follows:Q1 983Q2 944Q3 939Q4 972Therefore real income declines in the second and third quarters.
Within the Keynesian model, when planned aggregate demand equals total output,
Because Keynesian equilibrium is dependent on equality between planned aggregate expenditures and output, it need not take place at full employment. An economy in Keynesian equilibrium has no tendency for output to change even if output is well below full employment capacity.
Suppose that the Central Bank announces that it will increase the money supply by 5%. Producers collectively determine that this will cause a 5% increase in both the price of their products and the cost of their inputs. How will this impact real GDP?
In order for an increase in the money supply to cause a temporary increase in production, firms must essentially be fooled by inflationary price increases that are misread as an increase in demand. In the scenario described, producers know of the change in money and expect inflation, therefore the increase in the money supply has no impact.
If the amount of money in circulation is $200 million and the nominal GDP is $950 million, then the money velocity is ________.
Answer(s): B
Velocity of money is defined as GDP divided by the stock of money. It is simply the average number of times a dollar is used to purchase a final product or service during a year. Thus, $950 million divided by $200 million equals 4.75.
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