:Answer all, thanks.

In Econland, current money supply is 1,000, the price level is 3, and real output is 600. Real GDP grows by 2.5 percent per year, the money supply grows by 5 percent per year. The velocity of money is constant. Show your calculation for the following.

a. Use the quantity equation of money to find the velocity of money.

b. Suppose the velocity of money is constant. Use the quantity theory of money to find the inflation rate. What happens to inflation if money growth rate increases?

c. By how much does nominal GDP grow per year?

d. If the long-run nominal interest rate is 4 percent, what is the long-run real interest rate?

e. What happens to the long-run real interest rate if money growth rate increases?

What happens to the long-run nominal interest rate if money growth rate increases?

f. Suppose, instead of a constant velocity of money, the velocity of money in Econland grows steadily at 1% per year because of financial innovation.

Use the quantity theory of money to find inflation.

What is inflation if the velocity of money grows at 2% per year?

What is the relationship between the velocity of money and inflation?

How should the central bank change the money supply growth to compensate for the positive growth in velocity to keep inflation at the level in (b)?

l. The quantity theory of money we discussed in class assumes that the ratio of money to GDP is constant. This can be equivalently expressed by the Fisher equation: MxV=PxQ Where: - M represents the money supply. - V represents the velocity of money. which is the frequency at which the average same unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the number of times one unit of money is spent to buy goods and services per unit of time. - P represents the average price level. . 12 represents the volume of transactions in the economy (real GDP). This implies that: _ P x Q _ Nominal GDP V .. M Money Suppl y The quantity theory assumes that this ratio is constant (the velocity of money is constant). The theory then implies that if Real GDP (Q) and velocity of money (V) are constant then a percentage increase of the money supply will lead (in the long run) to the same increase of the Price level. More generally. if money velocity is constant then the growth rate of the money supply equals the growth rate of the price level (ination) plus the growth rate of real GDP. Use this information to answer the following question. Suppose that this year's money supply is $500 billion, nominal GDP is $10111] billion and real GDP is $50130 billion. (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% each year. Assuming the central bank can perfectly control the money supply, 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 to keep the price level stable? (:1) What money supply should the central bank set next year if it wants ination of 10%? 2. It is sometimes suggested that central banks should try to achieve zero ination. If we assume that velocity is constant, does this zero ination goal require that the rate of money growth equal zero? Eyes, explain why. lfno, explain what the mic ofnioney growth should equal