Question

1.One good：corn. The econony has enough labor ,capital, and land to produce Y=400 bushels of corn . V is constant. In 2005 , MS=$1000 , P=$5/bushel.For 2006, the Fed increases MS by 10%, to$1100.

(1) compute the 2006 values of nominal GDP and P. Compute the inflation rate for 2005-2006.

(2) suppose tech, progress causes Y to increase 6% in 2006 , to 424. Compute 2005-2006 inflation rate.

2.Suppose GDP equals $20 trillion, consumption equals $9 trillion, the government spends $3 trillion and has a budget defict of $800 billion. What are public saving, taxes, private saving , national saving, and investment?

Answer 1

1) Quantity Theory of money Equation,

Velocity of money ( V) * Money supply= nominal gdp

Nominal GDP 2005=400*5=2000

M=1000

Velocity of money=2000/1000=2

Given V is constant,

So,

M(2006)=1100

2*1100= nominal gdp( 2006)

Nominal GDP (2006)=2200

Because Y=400( fixed)

P=2200/400=5.5

Inflation=(5.5-5)/]*100=0.5/5]*100=0.5*20=10%

B) Nominal GDP (2006)=2200

Y=424

P=2200/424=5.19

Inflation=(5.19-5)/5=0.19/5=0.038*100=3.8%

2) public saving=- budget deficit=-800 billion or 0.8 trillion

Budget deficit=G-T

0.8=3-T

T=3-0.8=2.2 trillion

Private saving= Y-C-T=20-9-2.2=8.8 trillion

National saving=Y-C-G=20-9-3=8 trillion

Investment= national saving=8 trillion