Question

Question 20 (6 points) Suppose full employment real GDP is $1,000 billion and the money supply is $800 billion. Suppose also that the monetary velocity is constant and equal to 5. What is the price level? _.00 Now suppose the Fed increases the money supply by 4% and potential real GDP rises by 3%. In the long run, the inflation rate would be _.00% A/

Answer 1

Answel- 2 Velocity of money Money supply $800 billion Real GDP = & 1ooo billion Nomenol GDP Real GDP Pricelevel. ". Nomural GDP = $1000 x Price level I from the quantity theory of money, we have MU= P.Y P X 1000 XP - P = 2 Price level $2.00 ap² = 4

Money supply incrores by 44 New MS 104% $800 billion of $832 billion Inflation sale f Money growth tale Velocity growth role throte. rate of Real GDP grow since , velocity growth role is not giren, we assume it is zero Col. - Inflation sole Money growth sate Red GDP growth sole 4 % -3%. =1% Inflation rate would be 1.00%