Suppose that this year the money supply is $500 billion, nominal GDP is $10 trillion, and Real GDP is $5trillion. All underlying work must be shown to receive full credit
a. What is the price level this year?
b. What is the velocity of money this year?
Suppose that velocity of money is constant and the economy’s output of goods and services (Real GDP) rises by 4 percent each year.
c. What will happen to nominal GDP and the price level the next year if the Fed keeps the money supply constant?
d. What will happen to the nominal GDP and price level if the Fed increases the money supply the next year by 10 percent the next year?
e. What money supply should the Fed set the next year if it wants an inflation of 10 percent?
f. If the velocity of money and the economy output are constant ( as the classical economists believed) , what happens to the price level when the money supply increases from $1trillion to $4 trillion?