Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion and real GDP is $5 trillion.
a. What is the price level?
b. What is the velocity of money?
(Please calculate your answers in billions, i.e. leave off the zeros (0) if necessary.)
c. Suppose that velocity is constant and the economy's output of goods and services rises by five percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?
(These are numerical answers.)
d. What money supply should the Fed set next year if it wants to keep the price level stable?
e. What money supply should the Fed set next year if it wants an inflation of 10 percent? What will happen to real GDP in this situation?
(These are numerical answers.)
(a) Nominal GDP = $10 trillion
Real GDP = $5 trillion
Price level = Nominal GDP / Real GDP
Price level = ($10 trillion / $5 trillion)
Price level = 2
------------------------------------------------------------
(b) According to quantity theory of money.
M*V = P*Y
Where M is the money supply
V is the velocity of money
P is the price level
Y is the real GDP
Note: 1 trillion = 1000 billion
M= $500 billion
P = 2
Y = $5 trillion = $5000 billion
MV = PY
$500 billion * V = 2 * $5000 billion
V = ($10,000 billion / $500 billion)
V =20
Velocity of money is 20
------------------------------------------------------------
(c) MV = PY
In terms of growth
% change in M + % change in V = % change in P + % change in Y
Given information:
% change in V = 0
% change in M = 0
% change in Y = 5
=> 0 + 0 = % change in P + 5
% change in P = -5
Hence, the price level will fall by 5%
Nominal GDP = Price level * Real GDP
% change in nominal GDP = % change in Price level + % change in Real GDP
% change in nominal GDP = -5 +5
% change in nominal GDP = 0
Hence, there will be no change in the nominal GDP.
------------------------------------------------------------
(d) Now, % change in V = 0
% change in P = 0
% change in Y = 5
% change in M + % change in V = % change in P + % change in Y
=> % change in M + 0 = 0 + 5
=> % change in M = 5
There should be 5% increase in money supply.
New money supply = $500 billion (1+0.05)
New money supply = $525 billion.
------------------------------------------------------------
(e)
Now, % change in V = 0
% change in P = 10
% change in Y = 5
% change in M + % change in V = % change in P + % change in Y
=> % change in M + 0 = 10 + 5
=> % change in M = 15
There should be 5% increase in money supply.
New money supply = $500 billion (1+0.15)
New money supply = $575 billion.
Real GDP will rise by only 5%.
Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion and real...
Suppose that this years money supply is $500 billion, nominal GDP is $6 trillion, and real GDP is $2 trillion. a. What is the price level? What is the velocity of money? b. Suppose that velocity is constant and the economy's output of goods and services rises by 3% each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant? c. What money supply should the Fed set next...
Using the quantity Theory of Money formula, suppose that in 2020: Money supply = $50 Billion; Nominal GDP = $1.0 Trillion; and Real GDP = $500 Billion. a). Calculate the Price Level (P) (2 marks) and Velocity of Circulation (V) (2 marks). Show your calculations for a full mark. b) Suppose the velocity of circulation is constant (the one you calculated in (a), and the economy’s output of goods and services increases by 5% annually. Calculate Nominal GDP (or what will happen...
Using the quantity Theory of Money formula, suppose that in 2020: Money supply = $50 Billion; Nominal GDP = $1.0 Trillion; and Real GDP = $500 Billion. a). Calculate the Price Level (P) and Velocity of Circulation (V) . Show your calculations for a full mark. b) Suppose the velocity of circulation is constant (the one you calculated in (a), and the economy’s output of goods and services increases by 5% annually. Calculate Nominal GDP (or what will happen to...
If real GDP is $ 2.0 trillion, the money supply is $ 500 billion, and the price level is 1.75, we know that velocity is
Suppose this year’s money supply is $100, nominal GDP is $1500, and real GDP is $500. What is the price level? What is the velocity of money? What does this velocity of money mean?
• if the velocity of money is 2, the money supply in this economy is ($4.5 trillion/ $18 trillion/ $27 trillion/ $36 trillion/ $45trillion /$54 trillion) •because ( the federal reserve controls M/ velocity is assumed to be constant/ the AD curve is downward sloping ), the percentage increase in the price level Is ( less then/ the same as/ greater then ) the percentage increase im the money supply. the illustrates the ( importance of the federal reserve /...
Suppose the supply of money, measured by M1, is $2.6 trillion, output, measured by real GDP, is $21.4 trillion, and the velocity of money is 9.4. Suppose the supply of money increases to $4.9 trillion but GDP and the velocity of money do not change. What is the percent by which prices change? Provide your answer as a percentage rounded to two decimal places. Do not include any symbols, such as "$," "=," "%," or "," in your answer.
Page 2 Suppose full employment real GDP is $1,000 billion and the money supply is $800 billion. Suppose also that the monetary velocity is constant and equal to 5. What is the price level? 00 Page 3: Now suppose the Fed increases the money supply by 4% and potential real GDP rises by 3%. In the long run, the inflation rate would be 00% Page 4 Previous Page Next Page Page 9 of 28 Page 5: Submit Quiz 26 of...
Question 20 (6 points) Suppose full employment real GDP is $1,000 billion and the money supply is $800 billion. Suppose also that the monetary velocity is constant and equal to 5. What is the price level? _.00 Now suppose the Fed increases the money supply by 4% and potential real GDP rises by 3%. In the long run, the inflation rate would be _.00% A/
Question 1 Given the Equation of Exchange: Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate price level equals 2.If the velocity of money is 2,the money supply is: a. $20 trillion b. $10 trillion c. $30 trillion d. $25 trillion Question 2 Social insurance programs are: a. government programs intended to protect families against economic hardships. b. private insurance policies to protect families from hardships caused by government actions. c. private insurance policies...