Question 3

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 percent each year What will happen to nominal GDP and the price level next year if the Fed keep the money supply constant?

(c) What money supply should the Fed set next year if it wants to keep the price level stable?

(d) What money supply should the Fed set next year if it wants to inflation of 10 percent?