Hi All, I got couple questions from Book 7. 1. Velocity of M2 money supply in nation has been increasing steadily for past 7 years. Over same period, nation has experienced minimal growth in real output. According to equation of exchange, inflation over past 7 years would have: A. Increased more than growth in M2 money supply B. Increased minimally, consistent with growth in real output C. Increased at rate similar to growth rate in M2 Money supply D. Decreased due to growth in velocity of M2. Answer is A. What i dont understand is, MV = PY. If Y stays, and V goes up, surely P goes up by same amount, could anybody tell me what went wrong? 2. Growth of real GDP in czech is at historically low level. Economist is going to lower marginal tax from 68% to 35%. Primary Benefit of such policy is A. Higher level of disposable income and ability to consume goods and services leading to higher GDP B. Increased incentive for domestic investment leading to increased aggregate supply and GDP Answer is B. I answerered A, and i dont see why it’s wrong 3. A general question, what would the conditions in the industy need to be so that companies would be having longterm downward sloping supply curve, and for customers to have upward sloping demand curve ( is it even possible?) ? 4.If a country is facing amazingly high inflation, and the fed makes an unanticipated policy change to reduce inflation, how can that country is more likely to go into recession, rather than if the policy was anticipated ? (This is one of the question from book 7) Thanks
For 3 - You’re effectively asking “what conditions would need to exist for a supplier to want to produce LESS when the price his product can get in the market is HIGHER?” and “what conditions would need to exist for a consumer to want to demand MORE of a product when it’s price goes up?” - Logically, this doesn’t really happen.
i think they are both possible, if technology improves a process, more goods will be produced at a lower price and sold for a lower price, wouldn’t this be a downward sloping supply curve, also there are some goods that are more demanded with a higher price, premium brands of some items this could be true with
tmackenz You got it right, long term supply could be downwards if technology improves, and that was exactly the hint given in the questions. It didnt get it until you actually said it. But for the premium brand, i dont think that’s the case, demand curve for a premium brand should still be downward sloping, why would anybody pay more when they could pay less. So, is it even possible for a upward sloping demand curve?
i think for a very small market this may be possible still, i get what you’re saying though, but there are some products that people will demand more of if the price is high as they may want to give off that perception - think of clothes, some brands will actually sell more if they hike up their price - premium ice cream (hagen dazs comes to mind - failed as a discount ice cream, then came back as a premium ice cream - same product higher price)
- Velocity of M2 money supply in nation has been increasing steadily for past 7 years. Over same period, nation has experienced minimal growth in real output. According to equation of exchange, inflation over past 7 years would have: A. Increased more than growth in M2 money supply B. Increased minimally, consistent with growth in real output C. Increased at rate similar to growth rate in M2 Money supply D. Decreased due to growth in velocity of M2. Answer is A. What i dont understand is, MV = PY. If Y stays, and V goes up, surely P goes up by same amount, could anybody tell me what went wrong? — Yes, P has to increase, but at the very least it has to increase by more than M increases, otherwise the equation will not balance.
For Number 2, minimal growth in GDP indicates goods and services aren’t growing/increasing a lot, so by increasing disposable income, consumers will have more to spend but not so much goods and services to spend on, which could give rise to inflation (too much money chasing too few goods). Lowering tax rates will give companies an incentive to increase production/supply as their profits are taxed at a much lower rate (which means relatively higher cash flow for them) and so aggregate supply and GDP will increase.
Thanks all for the clarifications above. Still 1 more unanswered question, would appreciate the help 1.If a country is facing amazingly high inflation, and the fed makes an unanticipated policy change to reduce inflation, how can that country is more likely to go into recession, rather than if the policy was anticipated ? Anybody could give explanation on this?