Economics 219

Problem Set #5  

1)      Explain how each of the following events would affect money demand, money supply, and the price level.

a)      An increase in GDP.

b)      The increased availability of credit cards.

c)      A drop in the nominal interest rate.

2)      It is believed that the widespread availability of ATMs have drastically reduced the transactions costs involved in holding money?  How would this affect money demand?  What should happen to the price level. 

3)      Explain the impact on the price level of the following events:

a)      A one time doubling of the money supply

b)      An increase in the growth rate of the money supply.

4)      Suppose that all dollar bills are stamped with their date of issue and that their value grows over time at the nominal rate of interest.  For example, if the nominal interest rate is 10% per year, then a 1-year old dollar bill is worth $1.10.

a)      How does inflation affect the demand for money?

b)      Is there more or less “overshooting” when the Fed changes the rate of money growth?