Question

# Consider a simple economy that produces only pies. The following table contains information on the economy's...

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%)

(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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