Use the Quantity Equation for this problem. Suppose the money supply is $200, real output is 1,000 units and the price per unit of output is $1. (a) Calculate the velocity of money? ( I solved it answer is 5) (b) Assuming money neutrality, if the velocity is constant at the value you solved in part (a), what does the quantity equation suggest will happen if the money supply is increased to $400? (I solved: Prices will double and increase from $1 to $2 i.e. Classical Dichotomy) (c) Consider your answer to part (b). Would your answer be different if the short-run rather than the long-run is considered? Explain (i.e. Money neutrality no longer applies) (d) Now suppose that the money supply is growing at 8 percent per annum and real GDP is growing at 4.6 percent per annum. What is the inflation rate? (Assuming velocity remains constant)
Use the Quantity Equation for this problem. Suppose the money supply is $200, real output is 1,000 units and the price per unit of output is $1. (a) Calculate the velocity of money? ( I solved it answer is 5) (b) Assuming money neutrality, if the velocity is constant at the value you solved in part (a), what does the quantity equation suggest will happen if the money supply is increased to $400? (I solved: Prices will double and increase from $1 to $2 i.e. Classical Dichotomy) (c) Consider your answer to part (b). Would your answer be different if the short-run rather than the long-run is considered? Explain (i.e. Money neutrality no longer applies) (d) Now suppose that the money supply is growing at 8 percent per annum and real GDP is growing at 4.6 percent per annum. What is the inflation rate? (Assuming velocity remains constant)
