Question

suppose that this year's money supply is 600 billion, nominal GDP is 15000 billion, and real GDP is 7500 billion

a.what is the price level? what is the velocity of money

b. Suppose that velocity is constant and the economy's output of goods and services rises by 5% each year/ what will happen to nominal GDP and the price level next year if the fed keeps the money supply constant?

Answer 1

Solution:-

(A). MV = PY = Nominal GDP

M = Money Supply

V = Velocity of Money

P = Price Level

Y = Real GDP

600 Billion * V = 15000 Billion

V = 15000 / 6000 = 25

SO 25 is the Velocity of Money

7500 Billion * Price Level = 15000 Billion

Price Level = 15000 / 7500 = 2

So 2 is the Price Level

(B). MV = PY

If v is constant, and M is constant, if the yield goes up by 5% then the price level must go down. 1.05*x=1, so 95.2% of this year's price level. (Price level will fall for (1-0.9524=0.0476)=4.762%)