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6. Table 6-1 contains historical data for nominal GDP, M1, and M2. 6.1 Use this data to compute V1, velocity based on M1; and V2, velocity based on M2. Be sure to round your answers for velocity to two decimal places. Note that Nominal GDP indicates PY in the quantity theory of money. Table 6-1. GDP, Money, and Velocity Year Nominal GDP ($B) M1 ($B) 1995 1996 1997 1998 1999 7,000 7,500 8,300 8,700 9,200 900 1,100 1,000 1,200 1,300 M2 ($B) 3,200 3,700 3,600 4,100 4,300 V1 V2

6. Table 6-1 contains historical data for nominal GDP, M1, and M2. 6.1 Use this data to compute V1, velocity based on M1; and V2, velocity based on M2. Be sure to round your answers for velocity to two decimal places. Note that Nominal GDP indicates PY in the quantity theory of money. Table 6-1. GDP, Money, and Velocity Year Nominal GDP ($B) M1 ($B) 1995 1996 1997 1998 1999 7,000 7,500 8,300 8,700 9,200 900 1,100 1,000 1,200 1,300 M2 ($B) 3,200 3,700 3,600 4,100 4,300 V1 V2

Macroeconomics: Principles and Policy (MindTap Course List)
Macroeconomics: Principles and Policy (MindTap Course List)
13th Edition
ISBN:9781305280601
Author:William J. Baumol, Alan S. Blinder
Publisher:William J. Baumol, Alan S. Blinder
Chapter15: The Debate Over Monetary And Fiscal Policy
Section: Chapter Questions
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Question 41 6. Table 6-1 contains historical data for nominal GDP, M1, and M2. 6.1 Use this data to compute V1, velocity based on M1; and V2, velocity based on M2. Be sure to round your answers for velocity to two decimal places. Note that Nominal GDP indicates PY in the quantity theory of money. Table 6-1. GDP, Money, and Velocity Year Nominal GDP ($B) M1 ($B) 1995 1996 1997 1998 1999 7,000 7,500 8,300 8,700 9,200 900 1,100 1,000 1,200 1,300 M2 ($B) 3,200 3,700 3,600 4,100 4,300 V1 V2
Transcribed Image Text:Question 41 6. Table 6-1 contains historical data for nominal GDP, M1, and M2. 6.1 Use this data to compute V1, velocity based on M1; and V2, velocity based on M2. Be sure to round your answers for velocity to two decimal places. Note that Nominal GDP indicates PY in the quantity theory of money. Table 6-1. GDP, Money, and Velocity Year Nominal GDP ($B) M1 ($B) 1995 1996 1997 1998 1999 7,000 7,500 8,300 8,700 9,200 900 1,100 1,000 1,200 1,300 M2 ($B) 3,200 3,700 3,600 4,100 4,300 V1 V2
6.2 Assume you are a monetarist working for the Federal Reserve and are asked to predict nominal GDP one year in advance. Even if you knew the money supply, M, you would still need an estimate of V. One way to estimate velocity is to use data from the previous year. The idea is that, since you can't know velocity for 2000 until you know nominal GDP and M1 or M2 for 2000, you might use velocity for 1999 to predict GDP for 2000. Table 6-2 assumes that the Federal Reserve can control the money supply exactly. Use your numbers for velocity from the previous year to fill in the blank columns in Table 6-2 to see how well velocity and money predict income. Table 6-2. GDP, Money, and Velocity Year Actual M1 ($B) 1996 1,100 1997 1,000 1998 1,200 1999 1,300 2000 1,500 V1 from Previous Year Estimated Actual Estimated V2 from Income Income Income Previous ($B) ($B) ($B) Year 7,500 8,300 8,700 9,200 9,800 Actual M2 ($B) 3,700 3,600 4,100 4,300 4,700 Note: Express estimate for Nominal GDP to one decimal point. 6.3 Answer the following questions. Is velocity constant over time? If not, is it reasonable to estimate GDP based on velocity? Does it mean that the monetarist approach is inferior to the Keynesian approach? What might be the pros and cons of the two approaches to the computation of GDP?
Transcribed Image Text:6.2 Assume you are a monetarist working for the Federal Reserve and are asked to predict nominal GDP one year in advance. Even if you knew the money supply, M, you would still need an estimate of V. One way to estimate velocity is to use data from the previous year. The idea is that, since you can't know velocity for 2000 until you know nominal GDP and M1 or M2 for 2000, you might use velocity for 1999 to predict GDP for 2000. Table 6-2 assumes that the Federal Reserve can control the money supply exactly. Use your numbers for velocity from the previous year to fill in the blank columns in Table 6-2 to see how well velocity and money predict income. Table 6-2. GDP, Money, and Velocity Year Actual M1 ($B) 1996 1,100 1997 1,000 1998 1,200 1999 1,300 2000 1,500 V1 from Previous Year Estimated Actual Estimated V2 from Income Income Income Previous ($B) ($B) ($B) Year 7,500 8,300 8,700 9,200 9,800 Actual M2 ($B) 3,700 3,600 4,100 4,300 4,700 Note: Express estimate for Nominal GDP to one decimal point. 6.3 Answer the following questions. Is velocity constant over time? If not, is it reasonable to estimate GDP based on velocity? Does it mean that the monetarist approach is inferior to the Keynesian approach? What might be the pros and cons of the two approaches to the computation of GDP?
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