1. Suppose that in November the money supply was $200 billion, velocity was 10, and real GDP was $400 billion. What is the price level?
2. Suppose you believe in the quantity theory of money (monetarism). In the next month, December, you know that the money supply will increase to $300 billion. What would be your prediction of the price level if there were no changes in the resources in the economy (human capital, physical capital, etc.)?
3. In December, suppose the money supply does increase to $300 billion and there were no changes in resources in the economy. However, the price level did not change from November. What must have velocity been in December to ensure prices did not change given the increase in the money supply? Please give the numeric value of velocity in December.
1. Suppose that in November the money supply was $200 billion, velocity was 10, and real GDP was $400 billion. What is the price level?
2. Suppose you believe in the quantity theory of money (monetarism). In the next month, December, you know that the money supply will increase to $300 billion. What would be your prediction of the price level if there were no changes in the resources in the economy (human capital, physical capital, etc.)?
3. In December, suppose the money supply does increase to $300 billion and there were no changes in resources in the economy. However, the price level did not change from November. What must have velocity been in December to ensure prices did not change given the increase in the money supply? Please give the numeric value of velocity in December.
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4. Velocity and the quantity equation
Consider a simple economy that produces only cell phones. The following table contains information on the economy's money supply, the velocity of money, price level, and output. For example, in 2011, the money supply was $240, the price of a cell phone was $7.20, and the economy produced 500 cell phones.
Fill in the missing values in the following table, rounding to the nearest cent when necessary.
| Year | Quantity of Money | Velocity of Money | Price Level | Quantity of Output | Nominal GDP |
|---|---|---|---|---|---|
| (Dollars) | (Dollars) | (Cell phones) | (Dollars) | ||
| 2011 | 240 | 7.20 | 500 | (66.00/3,780.00/69.00/3600.00) | |
| 2012 | 252 | 15 | (0.53/0.50/7.56/7.20) | 500 | (3780/3600/66/69) |
The money supply grew at a rate of (5%/105%/2.44%/1.44%) from 2011 to 2012. Since cell phone output did not change from 2011 to 2012 and the velocity of money (increased/decreased/remained the same), the change in the money supply was reflected (partially/entirely) in changes in the price level. The inflation rate from 2011 to 2012 was (5%/2.44%/1.44%/105).
