1. a) A loaf of bread costs $2.00. Based solely on this information, what is the
ID: 1220564 • Letter: 1
Question
1.
a) A loaf of bread costs $2.00. Based solely on this
information, what is the value of the dollar (in terms
of loaves of bread)? ________________
If the price of a loaf of bread changes to $1.50, does the
value of the dollar rise or fall? ________________
b)Given the following information:
Consumers are very optimistic about the future.
The price of oil has just doubled.
The money supply is growing at a 6% rate.
The government has just cut spending by 8%.
Firms are doubling their investment.
The trade deficit has doubled in the last 6 months.
Calculate the long-run rate of inflation. ________________
c) Given the money supply is $1 trillion, the price level is 200, and real GDP is $5 trillion, calculate velocity. (The price index should be divided by 100
when used for this calculation.) ________________
Explanation / Answer
a)2 dollar=1 loaf of bread
Thus 1 dollar=1/2 laof of bread
Now 1.5 dollars=1 loaf of bread
thus 1 dollar=1/1.5 loaf of bread
Thus the value of dollars has increased.
b) The inflation is the Money supply. Hence inflation is 6%
c)We know `velocity of money=(Price*Transaction)/Money Supply
=(200*5 trillion)/(100*1 trillion)=10.
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