Question

Consider a simple economy that produces only pies. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2014, the money supply was $360, the price of a pie was $4.50, and the economy produced 800 pies.

Fill in the missing values in the following table, selecting the answers closest to the values you calculate.

Year	Quantity of Money	Velocity of Money	Price Level	Quantity of Output	Nominal GDP
	(Dollars)		(Dollars)	(Pies)	(Dollars)
2014	360	___	4.50	800	___ (169, 178, 3600, 3776)
2015	378	10	___	800	___ (169, 178, 3600, 3776)

The money supply grew at a rate of (0.56, 2.39, 5, 104.89%) from 2014 to 2015. Since pie output did not change from 2014 to 2015 and the velocity of money (increased, decreased, remained the same), the change in the money supply was reflected (entirely, partially), in changes in the price level. The inflation rate from 2014 to 2015 was  (0.56, 2.39, 4.89, 104.89%)

Answer 1

(1) M x V = P x Y [where Y: Real GDP and (P x Y) = Nominal GDP]

(i) In 2014, V = (P x Y) / M = ($4.5 x 800) / $360 = 10

(ii) In 2015, P = (M x V) / Y = ($378 x 10) / $800 = 4.725

(2) Money supply grew at 5% (= ($378/$360) - 1 = 1.05 - 1 = 0.05 = 5%).

(3) Since price & output didn't change and velocity of money remained the same, change in money supply was reflected entirely in changes in price level.

(4) Inflation = % Change in P = (4.725/4.5) - 1 = 1.0489 - 1 = 0.0489 = 4.89%