Choose the answer from Highlighted below: 1a.Assuming that money market equilibr
ID: 1200609 • Letter: C
Question
Choose the answer from Highlighted below:
1a.Assuming that money market equilibrium always exists, if the national price level P increases by 5%, and real money demand L increases by 2%, then the nominal money supply M needs to increase by 2/5%
decrease by 7%.
decrease by 3%.
increase by 7%.
increase by 3%.
1b.
A real depreciation of the dollar against the euro occurs when
there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the US inflation rate, regardless of the European rate of inflation.
there is a nominal depreciation of the US dollar against the euro which is at a higher rate than sum of the US inflation rate and the European inflation rate.
the cost the US basket in terms of the European basket (European basket per US basket) rises, where "basket" refers to the basket of goods and services used in a country's price index.
there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the European inflation rate, regardless of the US rate of inflation.
the cost the European basket in terms of the US basket (US basket per European basket) rises, where "basket" refers to the basket of goods and services used in a country's price index.
Explanation / Answer
a)Assuming that money market equilibrium always exists, if the national price level P increases by 5%, and real money demand L increases by 2%, then the nominal money supply M needs to increase by 7%.
An increase in price level decreases the supply of money, since the real money demand increases by 2% there would be further pressure on supply.
b)A real depreciation of the dollar against the euro occurs when the cost the European basket in terms of the US basket (US basket per European basket) rises, where "basket" refers to the basket of goods and services used in a country's price index.
An increase in the Euro currency would mean that the basket of real goods have become more expensive in terms of Euro than in terms of dollars.