Respuesta :
Answer:
a. The price level is $2.
The velocity of money is 20.
b. The nominal GDP will remain same, price level will decrease by 5%.
c. The money supply should be $525 billion.
d. The money supply should be $575 billion.
Explanation:
Suppose that this year's money supply is $500 billion, the nominal GDP is $10 trillion, and the real GDP is $5 trillion.
a. The real GDP = [tex]\frac{Nominal\ GDP}{Price\ level}[/tex]
$5 trillion = [tex]\frac{10}{P}[/tex]
P = [tex]\frac{10}{5}[/tex]
Price level =$2
The Fisher equation is,
MV = PY
here, M = money supply, P = Price level, V = velocity of money, Y = real GDP
0.5V = 10
V = 20
So the velocity of money is 20.
b. If the velocity is constant and the money supply is kept constant. The 5% increase in output level will cause the price level to decrease by 5% and the nominal GDP will remain the same. This is because the supply will increase by 5% but demand will remain the same.
c. The fed should increase the money supply by 5%. This will cause the demand to increase by 5%. While the supply is increasing by 5% as well. In this situation, the price level will remain the same.
The money supply should be
= [tex]$500\ billion + 5 \%\ of\ 500[/tex]
= $525 billion
d. If the fed wants inflation of 10 percent or the price level to increase by 10 percent, it should increase the money supply by 15%. This will increase demand by 15%. The supply is increasing by 5% only. The price level will thus increase by 15% - 5% = 10%.
The money supply should be
= [tex]$500\ billion + 15 \%\ of\ 500[/tex]
= $575 billion
