Question

1. If money supply increased by 3%, real output increased by 1%, and prices increased by 2%, is money neutral? why?

2. If you responded to the previous subquestion that money is neutral, what needs to be changed for money to become non-neutral?

3. According to the quantity of money, if money stock is equal to 15 trillion euro, real GDP is 20 trillion euro, and price index is 1.1, what is V?

4. How do you interpret the number you calulated in the previous subquestion?

5.During your job interview for a consulting position with Chase Bank, you receive the following data for one of the countries in which Chase operates.

In 2016, money supply was 10 trillion, in 2017, it grew to 11 trillion。 Realoutputgrew1.7% over the same time period. The interviewer tells you that it is safe to use the regular assumption about velocity of money in that economy and asks you to calculate the inflation rate between 2017 and 2016.

Answer 1

As per Quantity theory,

M x V = P x Y, therefore

% Change in M + % Change in V = % Change in P + % Change in Y

(1)

Monetary neutrality means that when M increases (decreases) by Y%, price level increases (decreases) by Y% but real output remains unchanged. In this case real output has increased by 1% and price level has increased by less than the increase in M. So money neutrality does not hold.

(2)

If neutrality does not hold, it means that velocity of money has to change which will make money non-neutral.

(3)

15 trillion x V = 1.1 x 20 trillion

15 trillion x V = 22 trillion

V = 22 trillion / 15 trillion = 1.47

(4)

A value of 1.47 for V means that on average, one unit of currency has changed hand (in monetary transactions) 1.47 times during the year.

NOTE: As per Answering Policy, 1st 4 parts are answered.