Suppose that this year’s money supply is €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 that velocity is constant and the economy’s output of goods and services rises by 5 per cent each year. What will happen to nominal GDP and the price level next year if the central bank keeps the money supply constant?

c. What money supply should the central bank set next year if it wants to keep the price level stable?

d. What money supply should the central bank set next year if it wants inflation of 10 per cent?