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- Price stability: Suppose you are the head of the central bank and your mandateis to maintain the price level at a constant value. Explain what you would doto the money supply in response to each of the following events:(a) Real GDP increases by 4% during a boom.(b) Real GDP declines by 1% during a recession.(c) Real GDP is growing at 3% per year.(d) Te velocity of money increases by 2%.(e) Te velocity of money declines by 1%.Question 48 When the inflation rate is expected to decrease, the demand for bonds everything else held constant. while the supply curve shifts tb the falls: right rises, left O falls; left rises; right * Previous Nex EPIC4the money supply in freedonia this year is $150 billion Nominal GDP is $750 billions and real GDP is $250 billion. assuming that velocity of money is stable real GDP grows by 2%this year and the money supply does not change. what are the velocity price level and inflation rate
- 2. What is inflation? How does the money supply effect the inflation? Explain these questions by using quantitative theory of money!1. Which do you think would be more harmful to the economy—an inflation rate that averages 5 percent a year that has a high standard deviation or an inflation rate of 7 percent that has a standard deviation close to zero? 2. Suppose a major bank needs to borrow $20 billion overnight that it cannot obtain from private creditors. The Fed is willing to make a discount loan of $20 billion provided that it will not alter the aggregate supply of reserves to the banking system. How can it do so?ABC Bank acquires XYZ Bank through a merger but subsequently fails due to some unforeseen incompatibilities resulting from their widely different cultures. This is an example of __________ risk. a. operational b. liquidity c. market d. country 2.An advantage of inflation rate targeting is a. it reduces inflationary expectations. b. inflation rates are easy to measure and forecast. c. there is almost no lag in inflation rate data. d. it allows the Federal Reserve an optimal amount of flexibility in conducting monetary policy. 3. ABC Bank has a significant portion of its assets in the form of US Treasury securities. Imagine that something happens that creates an expectation that the United States may default on its interest payments on its debt. This is an example of what kind of risk? a. Country risk b. Liquidity risk c. Operational risk d. Market risk…
- a) Discuss the monetary policy origins of asset price bubbles. What are the potential remedies? b) Would bond financed budget deficit be less inflationary than the latter financed by new money? A detail answer would be appreciatedRecently the economic conditions of the country have been weakened. Even though inflation has not increasedin the last year. Price of crude oil on the international market has increased by 15% last month. As a measurein controlling inflation in the country, the Monetary Policy Committee (MPC) of the Bank of Ghana has decidedto restrict the supply of money and increase the target policy rate by 100 basis points (1%):a. As a finance student, do you support the decision made by the monetary committee? Explain b. Explain how prices of debt securities would change in response to this policy? c. Assume the Monetary Policy Committee decides to reduce the target policy rate by 1.5% today and thisdecision is not backed by any financial market expectations. Will this change in policy directive affectyields paid by firms when they issue corporate bonds? d. In the last month, the 91day treasury bill rate (risk free rate of return) has increased from 10% to 15%per annum. What are the potential…The U.S. Federal Reserve responded to the 2020 COVID-19 lockdowns by implementing an expansionary monetary policy, causing the M2 money supply to rise from$15.3trillion in December 2019 to$18.3 trillion in July 2020. Over the same period, real GDP fell by 5.1 percent. (a) Assuming that the velocity of money was constant over this period, what should the inflation rate be, based on the quantity equation? Show your work. (b) Why would you not expect inflation to be immediate, following the Fed’s monetary expansion?
- 14. If the expected inflation rate is 5% and negotiators agree that the real wages should rise by 7%, the two sideswill agree to an increase in the money wage ofA 2%B 5 %C 7 %D 12%3. With the help of graphs describe what is likely to happen to interest rates in the US economy now that, a. The FED has announced a tigher monetary policy due to rising inflation expectations b. Lower taxes have increased the likelihood of higher than expected corporate profits8 Discuss whether there is a liquidity trap in Turkey with 14% policy rate while inflation rate is %70.