Velocity of money in 2014: ? Nominal GDP in 2014: ? Price level in 2015: 5.25/0.

Question

Velocity of money in 2014: ?

Nominal GDP in 2014: ?

Price level in 2015: 5.25/0.61/10.53

Nominal GDP in 2015: ?

Money supply grew at a rate of: ?

Velocity of money: Increased/Decreased/Remained the same

Money supply was reflected: Partially/Entirely

Inflation rate from 2014 to 2015 was: ?

5. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money price level, and output. For example, in 2014, the money supply was 60, the price of a pen was $5.00, and the economy produced 120 pens Fill in the missing values in the following table, rounding to the nearest cent when necessary. Money Supply Price Level Quantity of Output (Pens) 120 120 Nominal GDP (Dollars) Velocity of Money (Dollars) (Dollars,) Year 2014 2015 60 5.00 10 5.25 The money supply grew at a rate of money from 2014 to 2015 was % from 2014 to 2015. Since pen output did not change from 2014 to 2015 and the velocity of ,the change in the money supply was reflected in changes in the price level. The inflation rate

Explanation / Answer

Use quantity theory where PY = MV. In 2014, V = PV/M = 5*120/60 = 10. Nominal GDP in 2014 = PY = 5*120 = 600

In 2015, P = MV/Y = 63*10/120 = 5.25. Nominal GDP in 2015 = PY = 5.25*120 = 630

Money supply grew at (63 - 60)*100/60 = 5%

Velocity of money is unchanged or remained the same. Hence the change in money supply was reflected entirely in the prices . Hence inflation rate was (5.25 - 5)*100/5 = 5%

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