Year | Money Supply $ | Velocity of money | Price Level | Quantity | Nominal GDP |
---|---|---|---|---|---|
2015 | $ 100 | 20 | $ 4.00 | 500 | $ 2,000 |
2016 | $ 103 | 20 | $ 4.12 | 500 | $ 2,060 |
Velocity of money, V = ?
MV = PQ
Using the same formula we can determine the price level
Nominal GDP = Price per unit * Quantity
Nominal GDP (2015) = $4 *500 = $ 2,000
Nominal GDP(2016) = $4.12*500 = $ 2,060
The money supply grew at a rate of 3% from 2015 to 2016. Since, the output of Pie did not change from 2015 to 2016 and the velocity of money remained the same , the change in money supply was reflected entirely in the price level. The inflation rate from 2015 to 2016 was 3%.
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Consider a simple economy that produces only pies. The following table contains information on the economy's...
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