Suppose that this year\'s money supply is $500 billion , nominal GDP is $10 tril

Question

Suppose that this year's money supply is $500 billion , nominal GDP is $10 trillion, and real GDP is $5 trillion
a- What is the price level? what is the velocity of money?
b-Suppose that velocity is constant and the economy's output of goods and services rises by 5% each year. What will happen to nominal GDP and the price level next yearif the Fed keeps the money supply constant?
c-What money supply should the Fed set next year if it wants to keep the price level stable?
d- What money supply should the fed set next year if it wants inflation of 10%?

Explanation / Answer

MV = PY = Nominal GDP M = money supply, V = velocity of money, P = price level, Y = real GDP 500b*V=$10 trillion So 20 is the velocity of money 5 trillion * Price level = $10 trillion So 2 is the price level B. MV = PY If v is constant, and and M is constant, if the yield goes up by 5% then the price level must go down. 1.05*x=1, so 95.2% of this year's price level. (price level will fall for (1-0.9524=0.0476)=4.762%) c. P and V are constant, we get that as Y goes up M must go up by the same percentage. So we must increase M by 5% d. Not sure why you want inflation that high, but MV=PY=nominal GDP. M/P=Y/V 0.5*X/(2*1.1)=5*1.05/20 X=2*5*1.1*1.05/(20*0.5) =+15.5%

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