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Suppose that the economy only produces pizza, and 1.200 pizzas are sold in a given year at a unit price of $15. The quantity of
Suppose that the economy only produces pizza, and 1.200 pizzas are sold in a given year at a unit price of $15. The quantity of money in the economy is $6,000 1. Calculate the velocity of money. (5 points) 2. What is the new price of pizza if there is an increase in the quantity of money to $8,000, holding everything else constant? What is the new nominal GDP? {10 points) 3. Explain the relationship between the money supply and price. (5 points) Now use the version of the quantity theory of money in growth rates to answer questions 4-7. assuming that the real interest rate is xed at 2 percent. 4. Calculate the ination rate and nominal interest rate if the growth rate of money supply is 5 percent and the growth rate of real GDP is 2 percent. (6 points) 5. Calculate the ination rate if the Fed increases the growth rate of money supply to 10 percent, but the growth rate of real GDP is still 2 percent. (4 points) 6. Calculate the nominal interest rate based on part (e). What is the Fisher effect? What happens to the demand for money as a result? Explain. ('14 points) 7. Calculate the growth rate of the money supply if the Fed wants to achieve zero ination? (6 points)
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