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Question 3 Not yet answered Marked out of 1 P Flag question MankiwVille began the year in long-run equilibrium
Question 3 Not yet answered Marked out of 1 P Flag question MankiwVille began the year in long-run equilibrium. The government of MankiwVille, in consultation with the country's central bank, subsequently announced in February that with immediate effect, credit cards are considered illegal and may no longer be used when making purchases. The demand for money in MankiwVille has subsequently — and the velocity of money _. If Mankiwville's central bank keeps the money supply constant, in the short run the price level will __. In the long run, the price level will Select one: a. Increased; decreased; remain unchanged; decrease b. decreased; increased; remain unchanged; decrease c. decreased; increased; decrease; remain unchanged d. increased; decreased; increase; decrease
Question 4 Not yet answered Marked out of 1 P Flag question Suppose that the price level is initially 1 and output is 100. You then read an article that states the following: "Fertilizer prices declined by 8.5% in May 2020 as lower input costs and weak seasonal demand outweighed the gradual easing of supply bottlenecks". According to the AD/AS model (where the SRAS curve is horizontal), what would be the most probable paths for output and prices? Select one: a. Y: 100, 110, 100, P: 1,0.95, 1 b. Y: 100, 100, 100; P: 1,0.95, 1 c. Y: 100, 110, 100; P: 1,0.95, 0.95 d. Y: 100, 90, 100; P:1, 1.05, 1.05 e. Y: 100, 110, 100, P: 1, 1, 1.05
Question 5 Not yet answered Marked out of 1 P Flag question The full-employment level of output in AlgoaLand is R5 000 and the natural unemployment rate is 5%. The current unemployment rate is 8%. Use Okun's Law to find real GDP at the aforementioned unemployment rate. Select one: a. Real GDP is R4 500. b. Real GDP is R4 700. c. Real GDP is R4 900. d. Real GDP is R5 000.
Expert Solution
3Q)Ans:-
Step1)
When the credit cards are made illegal, people would try to keep more liquid money with them. This would increase the demand for money in the economy.
Also, the velocity of money decreased. This is because the consumers would not be willing to spend more money now. It would be less convenient to spend the liquid money they have. This would reduce the flow of money in the economy as the transactions would be reduced.
Step2)
The quantity theory of money says that:
MV = PT
Here, M is the money supply. V is the velocity of money. P is the price level. T is the transactions of goods and services.
When M remains constant, V is decreasing, which leads to decrease in T, the current price level of the economy would remain unchanged.
In the long run however, the price level would decrease.
Step3)
So from above discussion we conclude option(a) is correct.
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