1. Use the quantity theory of money equation for this problem. Suppose the money

Question

1. Use the quantity theory of money equation for this problem. Suppose the money supply is $550 billion, nominal output is 9 trillion, and real output is 5 trillion. What is the velocity? If the velocity is fixed, what would the inflation rate be id the money supply was decreased $530 billion? Is your answer consistent with the classical dichotomy? Explain. Suppose that when the money supply changed from $550 billion to $530 billion, real output falls by 2%. Now what will happen to inflation rate?

Explanation / Answer

money velocity = 5000/550=9.09 output =530*9.09=4817.7 P2/P1=4817.7/5000=.9634 inflation= -3.66% if real output falls P2=8820/4817.7=1.83 P1=9000/5000=1.8 inflation rate = 3/1.8=1.67%

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