33) Suppose nominal GDP is $12 trillion and the money supply is $2 trillion. Wha

ID: 1148831 • Letter: 3

Question

33) Suppose nominal GDP is $12 trillion and the money supply is $2 trillion. What is the velocity of money?

A) 0.17

B) 2

C) 6

D) it cannot be calculated

34) Following the last question, If real GDP stays the same and at the same time, money supply doubles, what is the inflation rate in this year?

A) 0%

B) 10%

C) 100%

35) Using the inflation you calculated from the last question, suppose first year's price level is 100, what is this year's price level?

A) 0

B) 100

C) 200

D) 600

36) Using the inflation you calculated from question 34), suppose first year's price level is 80, what is this year's price level?

A) 80

B) 100

C) 160

D) 180

As per Quantity theory equation,

Money supply (M) x Velocity (V) = Price level (P) x Real GDP (Y) [So, Nominal GDP = P x Y]

% Change in M + % Change in V = % Change in P (Inflation) + % Change in Y (= % Change in Nominal GDP)

Therefore:

(33) (C)

V = (P x Y) / M = $12 Trillion / $2 Trillion = 6

(34) (C)

When money supply doubles, % Change in M = 100%

100% + 0% (Assuming V is unchanged) = Inflation + 0% (Since Y is unchanged)

Inflation = 100%

(35) (C)

100% Inflation means price level has doubled.

This years price level = 100 x 2 = 200

(36) (C)

100% Inflation means price level has doubled.

This years price level = 80 x 2 = 160

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