Question

. Suppose in a hypothetical economy there is only one good (i.e. Barely) produced. There is enough labor, capital, and land available to produce a total of Y= 900 bushels in 100 days per acre. In 2018, the price per bushels was $6 and the Money supply was $3000. Consider the velocity of money constant according to the quantity theory of money. Assume that in 2019, the Fed increases MS by 6%, to $3100. (4 points).

- Compute the 2019 values of Price and nominal GDP. Also, Calculate the inflation rate for 2018 and in 2019.

- supposes after the introduction of new techniques the output (Y) is increased from 924 in 2019. Also, calculate the inflation rate for 2018-2019 after the technological development.

Answer 1

In 2018

Y = 900 in 100 days

So, for a year Y = 2700 Bushels [900*3] ( because production would happen 3 times a year)

P= 6

M = 3000

By QTM

MV =PY

V= PY/M

V = 6*2700/3000

V= 5.4

In 2019

M =3100

So, MV = PY

3100 * 5.4 = P 2700

16740/2700 = P

6.2 = P

Nomimal GDP = PY

Nomimal GDP= 6.2*2700

Nomimal GDP =16740

Inflation Rate = ((2019 Price -2018 Price)/ 2018 Price) *100

= ((6.2 -6)/6)*100

= (0.2/6)*100

Inflation Rate​​​​​​​ = 3.33%

New Y = 924 for 100 days

Y = 2772 (in a year)

M= 3100

V= 5.4

So, MV = PY

3100 * 5.4 = P 2772

16740/2772 = P

P= 6.038

Nomimal GDP = PY

Nomimal GDP= 6.038*2772

Nomimal GDP​​​​​​​ =16740

Inflation Rate = ((2019 Price -2018 Price)/ 2018 Price) *100

= ((6.038 -6)/6)*100

= (0.038/6)*100

Inflation Rate​​​​​​​ = 0.6333%