4 . Problems and Applications Q1

Suppose that this year's money supply is $400 billion, nominal GDP is $12 trillion, and real GDP is $4 trillion.

The price level is BLANK, and the velocity of money is BLANK.

Suppose that velocity is constant and the economy's output of goods and services rises by 5 percent each year.

Use this information to answer the questions that follow.

If the Fed keeps the money supply constant, the price level willBLANK , and nominal GDP will BLANK.

True or False: If the Fed wants to keep the price level stable instead, it should decrease the money supply by 5% next year.

A.True

B. False

If the Fed wants an inflation rate of 12 percent instead, it should the money supply by. (Hint: The quantity equation can be rewritten as the following percentage change formula:(PercentageChangeinM)+(PercentageChangeinV)=(PercentageChangeinP)+(PercentageChangeinY)

PercentageChangeinM+PercentageChangeinV=PercentageChangeinP+PercentageChangeinY.)