Question

1.) Suppose that Nominal GDP and velocity in Freedonia are $15 trillion and 3 respectively.

-What is the quantity of money in Freedonia?
-If the quantity of money increases to $10 trillion, what is the value of nominal GDP required to maintain the equilibrium of the equation of exchange?

2.)Suppose in Freedonia that the following information is available:
(Fixed) Aggregate Output = $15 trillion; (Fixed) velocity = 3 and quantity of Money = $5 trillion. What the value of the Price Level (P)?

3.) Assume now that (Fixed) Aggregate Output = $15 trillion; (Fixed) velocity = 3 and quantity of Money = $10 trillion. What the value of the Price Level (P)?

4.) Suppose that the % change of Money (M) is 7% and the % change of aggregate output (Y) is 5.75%. What is the inflation rate in Freedonia?

5.) Assume now that the % change of M is 2.75% and the % change of Y is 4.25%. What is the inflation rate in Freedonia?

Answer 1

(1)

As per quantity theory,

M x V = P x Y where M: Money supply, V: Velocity, P: Price level and Y: Real GDP, hence (P x Y) = Nominal GDP

(a)

M x 3 = $15 trillion

M = $5 trillion

(b)

When M = $10 trillion,

$10 trillion x V = P x Y

$10 trillion x 3 = P x Y

P x Y = Nominal GDP = $30 trillion

NOTE: As per Answering Policy, 1st question is answered.