Question

- Use the quantity theory of money to answer the following
questions.
- Find the number of times a year on average each dollar is spent when the price level is 20, the money supply is 55,000 and real gdp is 70,000.
- Calculate the money supply when nominal GDP is $1,254,987 and the velocity of money is 18 and the price level is 7.
- The growth rate of real GDP is 7%. Assume the growth rate of velocity is constant at a rate of 3%. If wish to set a target rate for inflation of 3% and maintain its current growth rate of real GDP, according to the quantity theory of money, what will the growth rate of the money supply need to be?

Answer #1

Quantity theory - MV = PY; M-money supply, V-velocity, Y-price level, Y-real GDP, PY-nominal GDP

a. P=20; M=55000; Y=70000

V = PY/M = 20*70000/55000 = **25.45**

b. PY = 1254987; V=18; P=7

M = PY/V = 1254987/18 = **69721.5**

c. From quantity theory of money,

percentage change in M * percentage change in V = percentage change in P * percentage change in Y

percetage change in M = percentage change in P*percentage change in Y/ percentage change in V

= 3*7/3 = 7

So the percentage change in money supply will have to be
**7%**

*note that percentage changes refer to the growth rate.
Growth rates are calculated as percentage change.*

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