Suppose that the money supply and the nominal GDP for a hypothetical economy are

ID: 1124856 • Letter: S

Question

Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $384 billion, respectively.

Instructions: Round your answers to 1 decimal place.

a. What is the velocity of money?

b. How will households and businesses react if the central bank reduces the money supply by $20 billion?

Households and businesses will not react.

Households and businesses will increase spending.

Households and businesses will reduce spending.

c. By how much will nominal GDP have to fall to restore equilibrium, according to the monetarist perspective?

A) As per quantity theory of money,

MV = PQ

96V = 384

V (velocity) = 4

B) Households and businesses will reduce spending

Reason: As money in hand will fall, so will their spending power

C) Till the point current inflation equals expected inflation.

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