ECON MACRO (with MindTap Printed Access Card) (New, Engaging Titles from 4LTR Press)
6th Edition
ISBN: 9781337408738
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 15, Problem 6P
To determine
To Calculate:The velocity of money under different circumsances.
Concept Introduction: The American economist, Irving Fisher, explained the quantity theory of money by examining the variables of money, price level and 
where P is the price level and Y is real
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Students have asked these similar questions
1) Assume that velocity (how many times a dollar is used in a given period) stays the same, and that GDP does not change. If the money supply doubles, what will happen to the general price level in the economy according to the quantity equation?
A) The inflation rate will double. B) The price level will fall by a half. C) The price level will double. D)The price level will not change either.
2) During the financial crises and recession of 2007-09, the Fed lowered the federal funds rate target to 0-0.25%. However, long-term interest rates, like mortgage rates, were still fairly high. One thing the Fed did to lower long-term rates was that the Fed :
A) bought long-term bonds
B) lowered the long-term interest rates by lowering the reverse repo rate
C) lowered the long-term interest rates by lowering the discount rate
D) sold long-term bonds
How does the concept of velocity of money relate to the quantity theory of money, and what factors can influence the velocity of money in an economy? A) The velocity of money has no connection to the quantity theory of money. B) The velocity of money represents the rate at which money changes hands in the economy and is a key factor in the quantity theory of money; factors like consumer confidence and banking practices can influence it. C) The velocity of money measures the total money supply in an economy and is unrelated to the quantity theory of money. D) The velocity of money is determined solely by government policies.
Suppose the money supply is €200, real output is
1,000 units, and the price per unit of output is €1.
a. What is the value of velocity?
b. If velocity is fixed at the value you solved for in
part (a), what does the
quantity theory of money suggest will happen if
the money supply is
increased to €400?
Chapter 15 Solutions
ECON MACRO (with MindTap Printed Access Card) (New, Engaging Titles from 4LTR Press)
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Similar questions
- Provide the equation for the velocity of money in terms of Price level (P), output (Y), and the amount of money in the economy (M) a) Explain what will happen to velocity if P increases and why. b) Explain what will happen to velocity if Y increases and why. c) Explain what will happen to velocity if M increases and why.arrow_forwardQ1. In 2019, an economy produces wheat only and has enough labor, capital, and land to produce 500 bushels of wheat (Y or real GDP). Price of wheat and money supply are $2 per bushel and $1,000 respectively. In 2020, the central bank increases money supply by $ 1040. Suppose both the velocity of money (V) and the amount of wheat produced remain unchanged. a. Compute the velocity of money and nominal GDP in 2019. b. Calculate inflation rate in year 2020. c. Use a well-labelled money supply-demand diagram to illustrate and explain what happen to the price level and the value of money after such money injection?arrow_forwardIf the money supply is $60 and nominal GDP is $360, then Group of answer choices A) the velocity of money must be 300. B) the velocity of money must be 4.2. C) the velocity of money must be 3. D) the velocity of money must be 60. E) the velocity of money must be 6.arrow_forward
- Suppose you are put in charge of the central bank in an economy where potential GDP is growing at 3% and inflation has been 5% a year for the past few years. a) You find out that your predecessor had increased the money supply by 7% a year during this time. What does that say about the rate of velocity growth in this economy? b) You decide that 5% inflation is too high a rate, and that you need to take steps to reduce inflation to 2% a year. Assuming that the growth rate of velocity is a constant, what is the new rate of money growth you should implement in this economy? c) Continuing with your answer from b), what is the new rate of money growth you should implement in this economy to keep inflation at 2% a year if all else equal i) The growth rate of potential output rises to 4% ii) The growth rate of velocity falls to 0% d) How would your answer to b) would change if velocity growth was not constant, but instead was a random variable vt? You can answer this with algebra or words,…arrow_forwardQuestion 41 6. Table 6-1 contains historical data for nominal GDP, M1, and M2. 6.1 Use this data to compute V1, velocity based on M1; and V2, velocity based on M2. Be sure to round your answers for velocity to two decimal places. Note that Nominal GDP indicates PY in the quantity theory of money. Table 6-1. GDP, Money, and Velocity Year Nominal GDP ($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 V2arrow_forwardIf GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?arrow_forward
- Question 2: Suppose the money supply is $50 in an economy where the nominal GDP is $1000, and the real GDP is $500. a) Can you calculate the price level? b) Can you calculate the money velocity? c) Now suppose output increases by 10 percent and the velocity is constant. Suppose Fed wants to keep prices constant through monetary policy. What will happen to the nominal GDP and price level? d) Suppose Fed targets 5 percent inflation. What money supply should the Fed set to achieve that?arrow_forwardIf GDP now rises to 1,600, but the money supply does not change, how has velocity changed? If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?arrow_forwardSuppose the supply of money, measured by M1, is $3.0 trillion, output, measured by real GDP, is $18.7 trillion, and the velocity of money is 7.1. Suppose the supply of money increases to $3.7 trillion but GDP and the velocity of money do not change. What is the percent by which prices change? Provide your answer as a percentage rounded to two decimal places. Do not include any symbols, such as "$," "," "%," or "," in your answer. Your Answer: Answerarrow_forward
- Suppose that velocity of money is constant, the expected inflation rate is always equal to the actual inflation rate, and the expected real interest rate is 3%. Answer the following questions. Justify your answers. a)Let the growth rate of the money supply rise to 10% without affecting the growth rate of real GDP or velocity. What happens to the inflation rate? If this new inflation rate becomes the expected inflation rate what happens to the nominal interest rate? b)Has the increase in the growth rate of money supply been generated by an open market operation conducted by the central bank? If so, how did the central bank generate this increase in the money supply? Only a qualitative answer is required.arrow_forwardIn the country Constantania, suppose the velocity of money is always the same. Last year, the money supply was $2 billion and real GDP was $5 billion. This year, the money supply increased by 6 percent, real GDP by 4 percent, and nominal GDP is $6.5 billion. a) Calculate the velocity of money and the price levels in the two years, and then calculate the inflation rate. b) Calculate the inflation rate using the formula AM/M + AV/V = AP/P + AY/Y, where the Greek letter A represents a change and the ratio AM/Mx 100 is the percentage change (or the rate of change) in M. Compare this result with the result you obtained in part a. Why could there be some difference? c) What is the difference between commodity money and fiat money? Why do people accept fiat currency in trade for goods and services?arrow_forwardConsider the following scenario: a. In Argentina, the central bank needs to determine by how much to increase the money supply next year. Suppose they estimate an increase in the overall economic activity (real GDP) of 2.5% percent and have a target inflation rate of 4%. The velocity of money has been observed to be constant over the past many years. By what level should the central bank change the money supply to achieve its inflation target? b. Next year, the central bank of Argentina wishes to reduce inflation to 2 percent, and estimates an increase in real GDP by 1.5 percent. What should be the change in the money supply? c. What is an "inflation tax", and how might it explain the creation of inflation by a central bank?arrow_forward
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