Problems & Applications (Ch 17) Due Today at 11-59 PM EST Attempts:·1-1-7 Keep t

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Problems & Applications (Ch 17) Due Today at 11-59 PM EST Attempts:·1-1-7 Keep the Highest: /4 1. Problems and Applications Q1 Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. The price level is , 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 increase the money supply by 2% next year False If the Fed wants an inflation rate of 9 percent instead, it shouldY be rewritten as the folowing percentage change formula %), (Hint: The quantity equation can ___ the money supply by percentage change formula: ge in M ) + ( Percentoge Change in V )-( Penentner Chempe in P) + (rrnenlare Change in y .) Grade it Now Save & Continus Contnue without saving 14

Explanation / Answer

Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion

1) Solution: The price level is __2___ and veleocity of money is __20___

Working: P = (P * Y )/Y = $10,000/$5,000 = 2.

V = (P * Y )/M = $10,000/$500 = 20

2) Solution: If the Fed keeps the money supply constant, the price level will fall and nominal GDP will be unchanged

Explanation: If M and V are unchanged and Y increases by 2%, then because M * V = P * Y, P must fall by 2%. As a result, nominal GDP will remain unchanged

3) Solution: True

Explanation: To keep the price level stable, the Fed need to increase the money supply by 2%, matching the increase in real GDP. Afterwards, because velocity is unchanged, the price level will be stable

4) Solution: If the Fed wants inflation to be 9% next year it should increase the money supply by 11%

Explanation: The money supply will increase by 11% because the P is increasing by 2% and Y is increasing by 9%. Thus both sides must go up/down proportionately

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