Suppose the velocity of money is 10 transactions per year, the price level for 2

Question

Suppose the velocity of money is 10 transactions per year, the price level for 2015 is $5, and real GDP in 2015 is $5,000,000. 3. What is nominal GDP in 2015? 4. What is the money supply in 2015? 5. If the economy's output of goods and services rises by 5% each year, what will nominal GDP be equal to in 2016 if the Fed keeps the money supply constant? 6. If the economy's output of goods and services rises by 5% each year, what will the price level be equal to in 2016 if the Fed keeps the money supply constant? 7. if the economy's output of goods and services rises by 5% each year, what money supply should the central bank set in 2016 if they want to keep the prices stable? 8. If the economy's output of goods and services rises by 5% each year, what money supply should the central bank set in 2016 if they want 10% inflation? 9. Hyperinflation is extremely rare in countries with independent central banks. Why? 10. According to the classical theory of money that we studied in chapter 12, money is neutral - but not really. Explain the ways that changing the money supply manages to affect the real economy even though changing the money supply changes prices and not output in any direct way

Explanation / Answer

Question 3

Real GDP in 2015 = $5,000,000

Price level in 2015 = $5

Calculate the nominal GDP in 2015 -

Nominal GDP in 2015 = Real GDP in 2015 * Price level in 2015

Nominal GDP in 2015 = $5,000,000 * $5 = $25,000,000

Thus,

The nominal GDP in 2015 is $25,000,000

Question 4

According to the Equation of exchange,

Money supply * Velocity = Nominal GDP

Velocity of money = 10

Nominal GDP in 2015 = $25,000,000

Calculate the money supply in 2015 -

Money supply in 2015 = Nominal GDP in 2015/Velocity

Money supply in 2015 = $25,000,000/10 = $2,500,000

The Money Supply in 2015 is $2,500,000.

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