PART B # 1. Suppose that this year\'s money supply $500 billion, nominal GDP is
ID: 1249537 • Letter: P
Question
PART B# 1. Suppose that this year's money supply $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion
A. what is the price level? What is the velocity of money?
B. Suppose the velocity is constant and the economy's output of goods and services rises by 5% each year. What will happen to nominal GDP and the price level next year if the FED keeps the money supply constant?
C. What money supply should the FED set next year if it wants to keep the price level stable.
D.What money supply should the FED 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 500b*V=$10 trillion So 20 is the velocity of money 5 trillion * Price level = $10 trillion So 2 is the price level B. MV = PY If v is constant, and and M is constant, if the yield goes up by 5% then the price level must go down. 1.05*x=1, so 95.2% of this year's price level. (price level will fall for (1-0.9524=0.0476)=4.762%) c. P and V are constant, we get that as Y goes up M must go up by the same percentage. So we must increase M by 5% d. Not sure why you want inflation that high, but MV=PY=nominal GDP. M/P=Y/V 0.5*X/(2*1.1)=5*1.05/20 X=2*5*1.1*1.05/(20*0.5) =+15.5%
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