Question

1. Problems and Applications Q1

Suppose that this year's money supply is $400 billion, nominal GDP is $12 trillion, and real GDP is $4 trillion.

The price level is

, and the velocity of money is

.

Suppose that velocity is constant and the economy's output of goods and services rises by 3 percent each year. Use this information to answer the questions that follow.

If the Fed keeps the money supply constant, the price level will   , and nominal GDP will   .

True or False: If the Fed wants to keep the price level stable instead, it should increase the money supply by 3% next year.

True

False

If the Fed wants an inflation rate of 11 percent instead, it should   the money supply by

. (Hint: The quantity equation can be rewritten as the following percentage change formula: (Percentage Change in M)+(Percentage Change in V)=(Percentage Change in P)+(Percentage Change in Y)Percentage Change in M+Percentage Change in V=Percentage Change in P+Percentage Change in Y.)

Answer 1

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