Reflect on the major topics of this unit and answer any three of the problems at the end of chapter eleven in the text book. Be sure to consider alternative perspectives as you answer the problems.

1. Here are annual values for M2 and for nominal GDP (all figures are in billions of dollars) for the mid-1990s.

Year M2 Nominal GDP

1993 3,482.0 $6,657.4

1994 3,498.1 7,072.2

1995 3,642.1 7,397.7

1996 3,820.5 7,816.9

1997 4,034.1 8,304.3

a. Compute the velocity for each year.

b. Compute the fraction of nominal GDP that was being held as money.

c. What is your conclusion about the stability of velocity in this five-year period?

2. Here are annual values for M2 and for nominal GDP (all figures are in billions of dollars) for the mid-2000s.

Year M2 Nominal GDP

2003 6,055.5 $10,960.8

2004 6,400.7 11,685.9

2005 6,659.7 12,421.9

2006 7,012.3 13,178.4

2007 7,404.3 13,807.5

a. Compute the velocity for each year.

b. Compute the fraction of nominal GDP that was being held as money.

c. What is your conclusion about the stability of velocity in this five-year period?

3. The following data show M1 for the years 1993 to 1997, respectively (all figures are in billions of dollars): 1,129.6; 1,150.7; 1,127.4; 1,081.3; 1,072.5.

a. Compute the M1 velocity for these years. (Nominal GDP for these years is shown in problem 1.)

b. If you were going to use a money target, would M1 or M2 have been preferable during the 1990s? Explain your reasoning.

4. The following data show M1 for the years 2003 to 2007, respectively (all figures are in billions of dollars): 1,306.1; 1,376.3; 1,374.5; 1,366.5; 1,366.5

a. Compute the M1 velocity for these years. (Nominal GDP for these years is shown in problem 2.)

b. If you were going to use a money target, would M1 or M2 have been preferable during the 2000s?

Explain your reasoning.

5. Assume a hypothetical economy in which the velocity is constant at 2 and real GDP is always at a constant potential of $4,000. Suppose the money supply is $1,000 in the first year, $1,100 in the second year, $1,200 in the third year, and $1,300 in the fourth year.

a. Using the equation of exchange, compute the price level in each year.

b. Compute the inflation rate for each year.

c. Explain why inflation varies, even though the money supply rises by $100 each year.

d. If the central bank wanted to keep inflation at zero, what should it have done to the money supply each year?

e. If the central bank wanted to keep inflation at 10% each year, what money supply should it have targeted in each year?

6. Suppose the velocity of money is constant and potential output grows by 3% per year. By what percentage should the money supply grow in order to achieve the following inflation rate targets?

a. 0%

b. 1%

c. 2%

7. Suppose the velocity of money is constant and potential output grows by 5% per year. For each of the following money supply growth rates, what will the inflation rate be?

a. 4%

b. 5%

c. 6%

8. Suppose that a country whose money supply grew by about 20% a year over the long run had an annual inflation rate of about 20% and that a country whose money supply grew by about 50% a year had an annual inflation rate of about 50%. Explain this finding in terms of the equation of exchange.