Suppose that this year\'s money supply is $50 billion, nominal GDP is $1 trillio

Question

Suppose that this year's money supply is $50 billion, nominal GDP is $1 trillion, and real GDP is $500 billion. (20 Marks) What is the price level? What is the velocity of money? Suppose that velocity is constant and the economy's output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the bank of Canada keeps the money supply constant? What money supply should the Bank of Canada set next year if it wants to keep the price level stable? What money supply should the Bank of Canada set next year if it wants inflation of 10 percent?

Explanation / Answer

MV = PY = Nominal GDP M = money supply, V = velocity of money, P = price level, Y = real GDP 50b*V=$1 trillion So 50 is the velocity of money 500 billion * Price level = $1 trillion So 5 is the price level

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