Suppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year?
Suppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year?
Chapter15: Monetary Theory And Policy
Section: Chapter Questions
Problem 3.7P
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![Suppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This
question concerns the Equation of Exchange in the Classical Quantity Theory of Money).
a) What is the price level (expressed as a percentage-i.e., as a price index)?
b) What is the velocity of money?
c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed
keeps the money supply constant, what will nominal GDP be next year?
d) Under the conditions in c) what will happen to the price level next year?
e) What money supply should the Fed set next year if it wants to keep the price level stable?
1) What money supply should the Fed set next year if it wants the inflation rate to be 8 percent?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe7ec8392-f331-4bf1-9e77-0739cc0b8ee8%2F429467f6-3ee9-4c8f-b89b-3147442a84b9%2Ftrntna_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Suppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This
question concerns the Equation of Exchange in the Classical Quantity Theory of Money).
a) What is the price level (expressed as a percentage-i.e., as a price index)?
b) What is the velocity of money?
c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed
keeps the money supply constant, what will nominal GDP be next year?
d) Under the conditions in c) what will happen to the price level next year?
e) What money supply should the Fed set next year if it wants to keep the price level stable?
1) What money supply should the Fed set next year if it wants the inflation rate to be 8 percent?
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