Suppose this year\'s money supply is 400billion, nominal GDP is 12 trillion,and

Question

Suppose this year's money supply is 400billion, nominal GDP is 12 trillion,and real GDP is 6 trillion. Suppose the veliocity of money is constant and economy's output of goods and services (real GDP) rises by 4% each year. What will happen to nominal GDP and the price level when Fed keeps the money supply constant?

a. what is the price level?

b.what is the veliocity of money

c.what will happen to nominal GDP and the price level if Fed keeps the money supply constant?

d.what wil happen to nominal GDP and the price level if the Fed increases money supply from 400 to 500 billions?

e.what money supply should Fed set next year if wants to keep up price level constant?F

f. what money supply should Fed set next yearif it want inflation of 8%?

PLease make sure you answer c,d,e,f, to get full points!!!!

Explanation / Answer

a.) MV = PQ

=> P = 0.4 * 0.04*6/12 = 0.008 trillion

b.) V = 0.04* real GDP = 0.04*6 = 0.24 trillion

c.) PQ will be constant, ie; the product of price level and nominal GDP will be constant.

=> assuming change in Q is less, price level will be almost constant.

d.) Assuming Q to be constant, Price level will increase.

e.) since GDP is increasing with 4% in a year :

money supply for next year = 1.04*400 = 416 billion

f.)P*Q next year would be = 1.08P * 1.04Q = 1.1232PQ

=> money supply should be = 1.1232*400 = 449.28 Billion

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