You are given the following hypothetical data for 2007 and 2008: 2007 2008 money

Question

You are given the following hypothetical data for 2007 and 2008:

2007 2008
money supply 1000 1050
velocity 8.0 8.0
Real GDP 12000 12000

a) Find the price level for 2007 and 2008. What is the rate of inflation between the two years?

Instructions: Round your answers to 2 decimal places.

2007= ???

2008= ???

Rate of inflation between 2007 and 2008=?????%

b) What is the rate of inflation between 2007 and 2008 if the money supply in 2008 is 1,100 instead of 1,050?

Rate of inflation between 2007 and 2008= ???%

c) What is the rate of inflation between 2007 and 2008 if the money supply in 2008 is 1,100 and output is 2008 is 12,600?

Rate of inflation between 2007 and 2008=????

Explanation / Answer

A) 2007: MV = PY (equation of exchange), where P = ?, M = 1000, V = 8, and Y = 12,000.
1000*8 = 12,000*P

Therefore P = 8,000/12,000 = 2/3 = 0.67 (Price level 2007)

2008: MV = PY (equation of exchange), where P =?, M = 1050, V = 8, and Y = 12,000.

1050*8 = 12,000*P

Therefore, P = 8,400/12,000 = 0.70 (Price level 2008)

Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.7 / 0.67 = 11.67%

B) 2007: Remains the same as in A.

2008: MV = PY (equation of exchange) , where P= ?, M = 1,100, V = 8, and Y = 12,000.

1,100*8 = 12,000*P

Therefore, P = 8,800/12,000 = 0.73 (Price level 2008)

Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.73 / 0.67 = 12.22%

C) 2007: Remains the same as in A.

2008: MV = PY (equation of exchange) , where P= ?, M = 1,100, V = 8, and Y = 12,600.

1,100*8 = 12,600*P

Therefore, P = 8,800 / 12,600 = 0.70 (Price level 2008)

Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.70 / 0.67 = 11.67%  

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