Ch. 22 Problems and Applications Q1

Suppose that this year's money supply is $600 billion, nominal GDP is $15 trillion, and real GDP is $3 trillion.

1. The price level is ? , and the velocity of money is ? .

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.

2. If the Fed keeps the money supply constant, the price level will (Stay the same, fall by 5%, raise by 5%) , and nominal GDP will (fall by 5%, fall by 25%, stay the same, rise by 25%, rise by 5%) .

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

True or false

4. If the Fed wants an inflation rate of 11 percent instead, it should (increase or decrease) 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.)