Introduction to Macro Economics

1. Use the Quantity Theory of Money equation (MV=PY) to predict what will happen in the following scenarios, that is:

Which variables will be directly affected (it will be one on each side) and will there be inflation, deflation or neither and by approximately how much:

a. The monetary authorities predict 5% growth in production this year, expand the money supply accordingly but real production only grows at 2%.

b. There is a major cyber attack and electronic banking is ceased for one month.

c. The monetary authorities did not foresee a huge immigration increase which increased the demand for money by 5% more than the authorities anticipated.

2. Many European countries have very difficult employment rules – it is very hard to fire people once they are hired. Let’s apply this concept to marriage. If the law was written in such a way that divorce was very hard, do you think:

a. The number of marriages would increase or decrease? Why?

b. The divorce rate would increase or decrease? Why?

c. If we could measure it, would marriages be happier or less so?

3. There are several theories about what causes inflation and while these theories can create inflationary pressures there is really only one cause of inflation and one cure. What are they?

4. What is the key difference in how Keynes and the Classicals view an economy in a downturn?

5. If Keynes is correct what are two reasons there may be stickiness in the adjustment mechanism?

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