Suppose that there is an economy that produces only one product, corn. The econo

Question

Suppose that there is an economy that produces only one product, corn. The economy has enough labor, capital, and land to produce y = 1,000 bushels of corn (real GDP). Suppose velocity is constant. In 2013 MS = $5,000, p = $5/bushel. (6 pts.)

(a) Compute nominal GDP and the velocity of money? (2 pts.)

Nominal GDP=                                                   Velocity of Money=

(b) Suppose that the Fed increases MS by 5%, to $5,250 for 2014. Suppose 2013 real GDP stays same as 1,000 bushels of corn. Compute the 2014 values of nominal GDP (Y) and p. Also compute the inflation rate for 2013-2014. (3 pts.)

2014 value of Nominal GDP=                         Price=                      Inflation rate for 2013-14=

(c) Suppose technological progress causes real GDP (y) to increase to 1,050 in 2014. Compute 2013-24 inflation rate. (1 pt.)

Explanation / Answer

A)

Nomianl GDP = Price X Quantity

Nominal GDP = $5 X 1000 = $5,000.

Velocity = (Price X Quantity) / MS = 5000/ 5000 = 1

B)

Fisher equation of quantity theory of money => MV = PY

M = 5250, Y = 1000 and V = 1

MV = PY

5250 x 1 = P X 1000

P2014 = $5.25

Nomainal GDP 2014 = 5.25 X 1000 = $5,250

Inflation rate = (5.25 - 5)/ 5 = 0.05 or 5%.

C)

Fisher equation of quantity theory of money => MV = PY

M = 5,250, Y = 1,050 and V = 1

MV = PY

5250 x 1 = P X 1050

P2014 = $5

Nomainal GDP 2014 = 5 X 1000 = $5,000

Inflation rate = (5 - 5)/ 5 = 0 or 0%.

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