Problem I

Real GDP 300 MILLIONS OF Dollars quantity of money was $60 million and the velocity of circulation of money was 10 . In 2012, the price level rose by 10 percent.

1. What was the price level in 2011?
2. What was the real GDP in 2012?
3. What was the velocity of circulation in 2012?
4. What was the quantity of money in 2012?

 

Suppose that in 2009 the money supply was $100 billion and real GDP was $300 billion. In 2010, money supply increased by 10 percent and real GDP increased by 5 percent. Nominal GDP in 2010 was $660 billion.

i) What was the price level in 2010? What was the velocity of money in 2010?

ii) Suppose that velocity was constant. What was the price level in 2009? What was the inflation rate in 2010?

If the velocity of money is 7, The price level increases from 100 to 120 due to a stimulus by the Central Bank. If the money supply increases by $1000 million and the initial money supply were $12000 million, using the quantity equation of money calculate its impact on the quantity of goods and services in the economy.

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.

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).