Question

The velocity of money in the small Republic of Sloagia is always the same. Last year, the money supply was $ 5 billion and real GDP was $ 20 billion.

This year, the money supply increased by 5 percent, real GDP by 4.5 percent, and nominal GDP is $ 19 billion.

    

           Calculate the velocity of money  

           The price level last year=

           The Price level this year =

           The inflation rate=

Answer 1

Answer:

Velocity of money = 3.62

Price level last year = 0.905

Price level this year = 0.909

Inflation rate = 0.44%

Calculation:

MV = PY

(PY = Nominal GDP)

MV = Nominal GDP

$Velocity\: of\: money (V) = \frac{PY}{M} = \frac{Nominal\: GDP}{Money\: supply}$

Last year,

$V = \frac{P * 20}{5}$

V = 4P

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This year, money supply increases by 5%.

Money supply = $5 + ($5 * 5%) = $5 + $0.25

Money supply = $5.25

Nominal GDP = $19 (Given)

$Velocity\: of\: money (V) = \frac{Nominal\: GDP}{Money\: supply}$

$Velocity\: of\: money (V) = \frac{19}{5.25} = 3.62$

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Given assumption: Velocity of money is always the same.

Price level last year :

V = 4P

3.62 = 4P

P = 3.62/4

P = 0.905

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Price level in this year:

MV = PY

$P = \frac{MV}{Y}$

Real GDP (Y) increases by 4.5% = $20 + ($20*4.5%) = $20 + 0.9 = $20.9

$P = \frac{5.25*3.62}{20.9} = 0.909$

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$Inflation\: rate = \frac{Price\: level\: this\: year - Price\: level\: last\: year }{Price\: level\: last\: year} * 100$

$Inflation\: rate = \frac{0.909-0.905}{0.905} * 100 = \frac{0.004}{0.905} * 100$

Inflation rate = 0.44%