Question

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 goods, corn, and solar calculators. Corn costs $3 per bushel, and solar calculators cost $10 each. If the price level is 1, and the total amount of money M is $100, and during one year, we buy 25 bushels of corn and 25 solar calculators, each dollar is spent how many times per year? Calcualte velocity of the circulation

Answer 1

1. The quantity equation is

MV = PY

Where, M = money supply

             V = Velocity of money

              P = Price level

              Y = Real GDP

We know, P = Nominal GDP / Real GDP = $200 billion / $300 billion = $0.67

MV = PY

800 * V = 200

V = 200 / 800 = 0.25

Thus, the price level is $0.67 and velocity in Freedonia is 0.25.