Question

The velocity of money in the small Republic of Sloagia is always the same. Last year, the money supply was $ 7 billion and real GDP was $ 20 billion.

This year, the money supply increased by 5 percent, real GDP by 4.2 percent, and nominal GDP is $ 19 billion.

          

           Calculate the velocity of money  

           The price level last year,  

           The Price level this year  

           The inflation rate.

Answer 1

Here we know that MV=PY ( by quantity theory of money)
where V is the velocity of money
In the first year, 7*V = P*20

V= 20*P/7 .....(1)
We don't know the P here
But in the second year, we are directly given the nominal GDP and increase in money supply so
V= 19/7*(1+0.05) = 19/7.35 = 2.585
So the velocity of money is 2.585

Now Price level in the first year = 2.585*7/20 = .905 ( from ..1)

Price level in second year = 7.35*2.585/(20*(1+0.042)) = 18.99/20.84 = 0.911

Inflation rate = change in price level/old price level = ((0.911-0.905)/0.905)*100 = 0.66%