Question.3187 - 3.) in this problem, all amounts are shown in billions Suppose this year's money supply is $800 billion, NGDP d $20 trillion and real GDP is $8 trillion A.) What is the price level? What is the velocity of money? B.) suppose the velocity is constant and the economy's output raises by 5% each year. What will be the NGDP 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.)Suppose the output still raises 5% next year, what money supply should the fed set next year if it wants inflation of -2%? E.) Because of the wide use of credit cards and other electronically payment, the velocity changed to 27. how much percentage is the change in velocity? The Fed set the target for economy growth at 5% next year and the inflation to be -2%, how much percentage changed?
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Suppose that this year’s money supply is $800 billion, nominal GDP is $20 trillion, and real GDP is $8 trillion. a. What is the price level? What is the velocity of money? b. 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 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. Suppose the output still raises 5% next year, what money supply should the fed set next year if it wants inflation of -2%? e. Because of the wide use of credit cards and other electronically payment, the velocity changed to 27. how much percentage is the change in velocity? The Fed set the target for economy growth at 5% next year and the inflation to be -2%, how much percentage change in money supply does the Fed intend to conduct? ANSWER: In this problem, all amounts are shown in billions. a. Nominal GDP = P x Y = $20,000 and Y = real GDP = $8,000, so P = (P x Y )/Y = $20,000/$8,000 = 2.5. Because M x V = P x Y, then V = (P x Y )/M = $20,000/$800 = 25. b. If M and V are unchanged and Y rises by 5%, then because M x V = P x Y, P must fall by 5%. As a result, nominal GDP is unchanged. c. To keep the price level stable, the Fed must increase the money supply by 5%, matching the increase in real GDP. Then, because velocity is unchanged, the price level will be stable. d. If the Fed wants inflation to be -2%, it will need to increase the money supply by 3%. Thus M x V will rise 3%, causing P x Y to rise 3%, with a 2% decrease in prices and a 5% rise in real GDP. e. Percentage change in velocity = (27/25)-1 = 8.0%. Economy growth rate of 5% next year would mean RGDP = $8,000*(1.05) = $8,400 bln. Price change of negative 2 percent means price would decrease to = 2.5 *.98 = $2.45. RGDP = $8,400*2.45 = $20,580 bln. As the equation would be M x V = P x Y, where P x Y = $20,580 bln and V = 27, therefore M = ($20,580 / 27) = 762.22 bln. This is a negative change of = (800/762.22)-1 = 4.96%.More Articles From Economics
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