Suppose that this year the money supply is $500 billions, nominal GDP is $10 trillions, and Real GDP is $5trillions.
All underlying work must be shown to receive full credit
a. What is the price level in the economy this year?
b. How often is dollar spent on the economy output this year?
Suppose that velocity of money is constant and the economy’s output of goods and services (Real GDP) rises by 5 percent each year.
c. How the nominal GDP and the price level changes if the Fed increases the money supply to 550 billions the next year?
d. Suppose that this year the money supply is $500 billions. What money supply should the Fed set the next year if it wants an inflation rate of 3 percent?
e. Suppose that during one period, the velocity of money is constant and during another period it undergoes large fluctuations. During which period will the quantity theory of money be more useful in explaining changes in the inflation rate? Briefly explain