ECON University of California Irvine Quantity Theory of Money Discussion

Question Description

QUESTIONS FROM PAST EXAMS

In order to get ready for the final exam, I would like you to answer questions from past exams.

Midterm exam #2, Fall 2018: Questions 10; 11; 13; 14; 15; 16; 17; 21

Choose the correct answer for each question and provide a very detailed explanation for your choices. Answers will not count without clear, rigorous, and complete justifications.

2.COMBINING PRODUCTION MODEL AND QUANTITY THEORY

We can combine the models we have seen so far to explain both real GDP and the price level in the long run. Real GDP is determined according to the production model, which is summarized in Table 4.1 of your textbook where the aggregate production function is Cobb-Douglas with labor share equal to 2/3. The price level is obtained from the quantity theory, which is summarized in Table 8.3 of your textbook. The nominal wage (in dollars) is the product of the real wage and the price level.

Express the equilibrium real wage as a function of the capital stock, labor force, and TFP.
Express the equilibrium nominal wage as a function of the money supply, velocity of money, and labor force.

Suppose TFP increases. What happens to the real and nominal wages?
Suppose the money supply increases. What happens to the real and nominal wages?

Your answers must be detailed and you must provide the different steps leading to your conclusions.

GETTING TO KNOW THE DATA: MONEY SUPPLY AND PRICE LEVEL.

Use the FRED website (https://fred.stlouisfed.org/) to plot the money supply and price level since 2010. (You can plot directly from the FRED website or download the Excel file and plot using Excel.) For the money supply, you can choose M1. For the price level, you can take the consumer price index (CPI). Compute the rate of growth of M1 and the rate of growth of P. Does it seem consistent with the quantity theory?

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