1 explain the quantity equation MVPV 2 What does the assupti

1) explain the quantity equation: M.V=P.V

2) What does the assuption of constant velocity imply ?

3) If inflation rise from 6 to 8% what happens to real and nominal interest rate ?

4) Explain the roles of monetary and fiscal policy in causing and ending Hyperinflations.

5) define Real and Nominal variable and give an example of each.

Thanks

Solution

1.)Quantity equation commonly used to describe the relationship between the money stock and aggregate expenditure:

MV = PY

The terms on the right-hand side represent the price level (P) and Real GDP (Y). Taken together these two terms represent Nominal GDP or a measure of the total spending that takes place in an economy in a given time period.

On the left-hand side, M represents some measure of the money supply, perhaps M₁, and \'V\' represents the velocity of this monetary measure. Velocity represents the number of times money changes hands in support of the total spending in an aggregate economy.

2.) MV = PY with V constant implies that a change in the quantity of money M must cause a proportionate change in nominal income PY. Thatis, if velocity is fixed, then the quantity of money determines the nominal value of the
economy’s output/GDP.

3.) Real interest rate=Nominal interest rate-inflation rate

If inflation rate rises ,Either real will have to fall or nominal will have to rise to keep balance in equation.

4.)Fiscal Policies include raising or lowering of taxes. If we raise taxes we are taking money out of circulation. Clearly raising taxes will slow down spending, economic growth as well as inflation.

The Fed\'s basic monetary policy tools are Reserve operations,Discount rate,Printing money.

Each policy has one basic goal, impact the money supply. All of these policy actions work using the laws of supply and demand. The more money in circulation, the more spending there is and the higher inflation is. The less money there is in circulation, the less spending there is, inflation decreases.

5.)In economics, the nominal values of something are its money values in different years. Real values adjust for differences in the price level in those years.For example,Nominal wage is what labour receives.

Real wage is what labour can buy from this wage at given prices.