Question

1. Let an economy be characterized by two people, Jack and Jill. Each period Jack buys 10 fish from Jill and Jill buys 15 coconuts from Jack.

a. If the price of fish is $3 and the price of coconuts is $2, what is nominal GDP?

b. If the money supply is $20, what is velocity?

c. If velocity is independent of the other variables, write an equation representing aggregate demand for this economy.

d. Let’s call the output above Y=10 and let this be the long-run equilibrium level of output. In this case, what is the long-run equilibrium price level?

e. Now imagine that the money supply increases to $30. Assume that velocity is constant in the long run. What will the long-run equilibrium level of output and price level be? Show this change on a graph of aggregate supply and aggregate demand.

f. Now imagine that output doubles to 20 fish and 30 coconuts. Show the effect of this in the long run on another aggregate supply/aggregate demand graph (and put numbers on it). Assume that the money supply is still $20 and velocity is constant at the value found above.

Answer 1

A) nominal GDP =10*3+15*2

60

B) MV = PY.

M is a measure of the money supply

V its velocity,

nominal GDP is written as the product of the overall price level (P) with real GDP (Y).

$20V=60

V=60/20

V =3

C)

AD=10f+15c

D)if y=10, actual price level equal to anticipated price level