Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Price Level (P) : 1.1 Velocity of Money (V) : 4.5 Real GDP (Y) : 90 mllion Quantity of Money (M) : 22 million M
Price Level (P) : 1.1
Velocity of Money (V) : 4.5
Real GDP (Y) : 90 mllion Quantity of Money (M) : 22 million
M x V = P x Y and %M + %V = %P + %Yv
- Suppose that the velocity stays constant year to year. The output of goods and services rises by 3% each year. The central bank is increasing the money supply by 7% each year. How much will the nominal GDP and the price level increase annually as a result?
- Calculate the new level of nominal GDP and the price level after one year.
- Assume the same growth rate in output as above. Instead of simply growing the money supply by 7% annually, the central bank's objective is now to keep the price level constant from year to year. How much should they increase the money supply annually (in percentage terms) to maintain the price level constant?
- What is the new level of the money supply after one year is the central bank follows the growth rate you found in part (d)?
- Suppose again, like in part (b), that the output increases by 3% and the money supply increases by 7% for a number of years. Then one year, for some unknown reason, the growth rate of output drops to only 1% If the central bank keeps growing the money supply by 7%, what will be the new inflation rate in this economy?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started