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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion.

a. What is the price level? What is the velocity of money?

b. Suppose that velocity is constant and the economy’s output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?

c. What money supply should the Fed set next year if it wants to keep the price level stable?

d. What money supply should the Fed set next year if it wants inflation of 10 percent?

Subpart (a):

To determine

Money supply, price level, and velocity.

Explanation

The velocity is calculated as follows:

Velocity = Nominal GDPMoney supply=$10,000 billion$500 billion=20

Velocity is 20

Subpart (b):

To determine

Money supply, price level, and velocity.

Subpart (c):

To determine

Money supply, price level, and velocity.

Subpart (d):

To determine

Money supply, price level, and velocity.

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