econmic assignment 7

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All of your answers should be either in bold or a color to make them stand out from the questions.

1. The classical theory of monetary neutrality suggests that in the long run which variables are affected (nominal/real)?

2. What does the term, the velocity of money mean?

3. Are more goods and services likely to be produced if the quantity of money in an economy grows? (yes/no)

Referring to the graph above. The money supply is increased from MS1 to MS2? Now answer the following questions.

a. (2 points) Why are MS1 and MS2 vertical lines?

b. (2 points) Value of Money: (increased/decreased)

c. (2 points) Price Level: (increased/decreased)

d. (2 points) Quantity of Money Demanded: (increased/decreased)

5. What is the difference between a nominal and a real variable?

6. What is menu cost?

7. What is shoeleather cost?

8. Suppose that this year's money supply is $1/2 trillion, nominal GDP is $15 trillion, and real GDP is $10 trillion.

a. (4 point) What is the price level?

b. (4 points) What is the velocity of money?

c. (4 points) If the velocity of money is constant, but output of goods and services rises by 5%, what money supply should the FED set next year if it wants to keep the price level stable?