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%**

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