1. Problems and Applications Q1 Suppose that this year\'s money supply is $600 b

Question

1. Problems and Applications Q1 Suppose that this year's money supply is $600 billion, nominal GDP is $15 trillion, and real GDP is $3 trillion. The price level is 1, and the velocity of money is Suppose that velocity is constant and the economy's output of goods and services rises by 2 percent each year. Use this information to answer the questions that follow. If the Fed keeps the money supply constant, the price level will , and nominal GDP will True or False: If the Fed wants to keep the price level stable instead, it should keep the money supply unchanged next year. True O False the money supply by If the Fed wants an inflation rate of 10 percent instead, it should can be rewritten as the following percentage change formula: (Percentage Change in M) + (Percentage Change in V)-(Percentage Change in P) +(Percentage Change in Y).) % . (Hint: The quantity equation

Explanation / Answer

Answer to blank 1: $3

Answer to blank 2: 25

Explanation:

The quantity theory equation states that

MV = PY

Where, M = Quantity of money

             V = velocity of money

            P = price level

           Y = quantity of output

So, P = MV / Y

         = $15 trillion / $5 trillion

         = $3

By substituting the value of P in the above equation

M * V = P*Y

V = P*Y / M

   = $15 trillion / $600 billion

   = 15,000,000,000,000 / 600,000,000,000

   = 25

Answer to blank 3: decrease

Answer to blank 4: unchanged

Explanation:

If M and V are unchanged and Y rises by 2%, then because M × V = P × Y, P must decrease by 2%. As a result, nominal GDP will be unchanged

Ans: False

Explanation:

To keep the price level stable, the Fed must increase the money supply by 2%.

Answer to blank 5: increase

Answer to blank 6: 12%

Explanation:

(% change in M) + (% change in V) = (% change P ) + (% change in Y)

Since % change in V = 0

% change in M = (% change P ) + (% change in Y)

                        = 10% + 2%

                        = 12%

Thus, Fed should set the money supply for next year to be 12%.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.