Question

Suppose that this year’s money supply is $400 billion, nominal GDP is $10trillion, and real GDP is $4 trillion.

1.What is the price level? What is the velocity of money?

2. Suppose that velocity is constant and the economy’s output of goods and services rises by4% each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?

3.What money supply should he Fed set next year if it wants to keep the price level stable?

4.What money supply should the Fed set next year if it wants inflation of 10%?

Answer #1

The symbols used are:

Money supply = M

Velocity of money = V

Price level = P

Real GDP = Y

1) Nominal GDP = P * Y = 10 trillion

Real GDP (Y) = 5 trillion

So,

P * 5 trillion = 10 trillion

P = 10 trillion / 5 trillion = $2

The quantity theory equation is,

MV = PY

V = PY / M = 10 trillion / 400 billion = 10,000,000,000,000 / 400,000,000,000 = 25

**Thus, the price level is $2 and the velocity of money is
25**.

2. If V and M remains constant and Y
rises by 4% , **P must decrease by 4%**, so that the
equation MV = PY will be correct. The nominal GDP will be
unchanged.

3. If the FED wants to keep the
price level stable, **it must increase the money supply by
4%**.

4. If FED wants the inflation to be
10% for next year, **it would increase the money supply by
14%**. It means, M*V will rise by 14% causing P * Y to rise
by 14% (i.e., 10% increase in price level and 4% increase in real
GDP.

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...

Suppose that this year's money supply is $500 billion, nominal
GDP is $10 trillion, and real GDP is $5 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 4 percent each year. Use this
information to answer the questions that follow.
If the Fed keeps the money supply constant, the price level will
_______ (rise by 4%, stay the same,...

Suppose that this year's money supply is $500 billion, nominal
GDP is $10 trillion, and real GDP is $5 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
(stay the same, rise by 3%, or fall...

1. The government of a country increases the growth rate of the
money supply from 5 percent per year to 50 percent per year. What
happens to prices? What happens to nominal interest rates? Why
might the government be doing this?
2.List and describe six costs of inflation. /6
3.Explain how an increase in the price level affects the real
value of money. /2
4.According to the quantity theory of money, what is the effect
of an increase in the...

The quantity theory of money we discussed in class assumes that
the ratio of money to GDP is constant. This can be equivalently
expressed by the Fisher equation:
M ×V = P × Q
Where:
• M represents the money supply.
• V represents the velocity of money. which is the
frequency at which the average same unit of currency is used to
purchase newly domestically-produced goods and services within a
given time period. In other words, it is the...

Suppose that the Price level = 120, Supply of Money = $20
billion, and Real GDP = $4 billion. If the velocity of money stays
the same but Real GDP increases by 20%, what will happen to the
price level if the supply of money increases by $10 billion?
Select one:
a. It will increase to 125
b. It will increase to 132
c. It will increase to 144
d. It will increase to 150
e. It will increase to...

1.The money supply in Freedonia is $800 billion. Nominal
GDP is $200billion and real GDP is $300 billion. What are the price
level and velocity in Freedonia?
2.The aggregate production function demonstrates the
fact that the marginal product of labor increases at a(n) what
rate?
3. In the Four-Graph macroeconomic long-run model (labor
market, aggregate production function, the diagonal line to shift
Y, and AD-AS), what does it say about output and
employment?
4. Suppose the economy has only two...

Suppose this year’s nominal GDP is $1,000 million and price
level is 100. If nominal GDP increases by 2 percent and the price
level goes up by 3 percent next year, calculate next year’s nominal
GDP, price level, and real GDP.

Suppose this year’s nominal GDP is $1,000 million and price
level is 100. If nominal GDP increases by 2 percent and the price
level goes up by 3 percent next year, calculate next year’s nominal
GDP, price level, and real GDP.

Suppose that initially the money supply is $1 trillion, the
price level equals 3, the real GDP is $5 trillion in base-year
dollars, and income velocity of money is 15. Then the money supply
increases by $100 billion, while real GDP and income velocity of
money remain unchanged. a. According to the quantity theory of
money and prices LOADING..., calculate the new price level after
the increase in money supply: nothing.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 3 minutes ago

asked 8 minutes ago

asked 10 minutes ago

asked 11 minutes ago

asked 28 minutes ago

asked 39 minutes ago

asked 46 minutes ago

asked 58 minutes ago

asked 59 minutes ago

asked 1 hour ago

asked 1 hour ago