Question

Velocity and the quantity equation

Consider a simple economy that produces only cell phones. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $200, the price of a cell phone was $5.00, and the economy produced 400 cell phones.

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

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)	(Cell phones)	(Dollars)
2017	200	??	5.00	400	?
2018	202	10	??	400	??

The money supply grew at a rate of (.5%, 1%, 1.25%, 101%) from 2017 to 2018. Since cell phone output did not change from 2017 to 2018 and the velocity of money (increased, decreased, remained the same), the change in the money supply was reflected (partially, entirely) in changes in the price level. The inflation rate from 2017 to 2018 was (.5%,1%,1.25%,101%).

Answer 1

In 2017: Velocity = 10; Nominal GDP = 2,000
(MV = PY
So, V = PY/M = 5*400/200 = 10
Nominal GDP = P*Y = 5*400 = 2000)

In 2018: Price level = 5.05; Nominal GDP = 2020
(MV = PY
So, P = MV/Y = 202*10/400 = 5.05
Nominal GDP = P*Y = 5.05*400 = 2020)

1%; remained the same; entirely; 1%
(Growth rate of money supply = [(202-200)/200]*100 = 2/2 = 1%
V remained the same at 10.
So, change in M is entirely due to change in P
Inflation rate = [(5.05-5)/5]*100 = (0.05/5)*100 = 1%)