Question 1 Consider a nation in which income velocity is constant at a value of

Question

Question 1

Consider a nation in which income velocity is constant at a value of 1. Its money supply is currently growing at a rate of 5% annually, and prices are growing at 2% annually.

Calculate the growth rate of output for this nation. Enter your answer as a percent, but without a percentage sign. Carefully follow all numeric instructions.

Question 2

Consider a nation with a money supply of $100,000. Its income velocity is constant at a value of 1, and real output totals 40,000 units.

Calculate the price level for this nation, carefully following all numeric instructions.

Question 3

The inflation fallacy refers to the observation that

Explanation / Answer

1. % change in Money Supply = % change in Prices + Growth rate of real GDP

5 = 2 + Growth rate of real GDP

Growth rate of real GDP = 3

2. MV = PY

Where M = money supply , V = velocity , P = price levels , Y = output

$100,000*1 = P*40,000

P = $2.5 per unit

So, Price level = 2.5

3.   the American public thinks inflation is higher and more damaging than economists indicate

As Inflation fallacy is that people consider inflation to be bad as they only see thee impact of inflation on the prices of goods and services they purchase whereas economists also see the impact of inflation on the incomes earned by the households.

If you don't understand anything then comment, I'ill revert back on the same. ;)

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