Velocity and the quantity equation Consider a simple economy that produces only
ID: 1208727 • Letter: V
Question
Velocity and the quantity equation Consider a simple economy that produces only cell phones. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2010, the money supply was dollar 320, the price of a cell phone was dollar 8.00, and the economy produced 600 cell phones. Fill in the missing values in the following table, rounding to the nearest cent when necessary. The money supply grew at a rate of from 2010 to 2011. Since cell phone output did not change from 2010 to 2011 and the velocity of money the change in the money supply was reflected in changes in the price level. The inflation rate from 2010 to 2011 was .Explanation / Answer
Quantity theory of Money ; MV = PQ where M = Money Supply, V is velocity, P is price and Q is output.
Nominal GDP = PxQ
in 2010, V = PQ / M => 8x600 / 320
V = 15
Nominal GDP = 8x600 => 4800
in 2011; P = MV / Q
P = 336 x15 / 600
P = 8.4
Nominal GDP = 8.4 x 600 => 5040
Growth rate of money supply = (336-320) x 100 / 320
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