Economics: Principles & Policy
14th Edition
ISBN: 9781337912679
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning US
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Question
Chapter 31, Problem 2TY
To determine
Calculate the velocity of money.
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Suppose the money supply M has been growing at 19% per year and nominal GDP, PY, has been growing at 77% per
year. The data are as follows (in billions of dollars).
M
PY
V
2021
400
4000
2022
476
7080
2023
566.44
12,532
Calculate the velocity V in each year. (Fill in the table above, rounding to one decimal place.)
Velocity is growing at an approximate rate of % per year. (Round to the nearest whole number.)
Suppose an economy has a price index at 15, real GDP of $11.09 trillion, and a money supply (M2) of $23.67 trillion. What is the M2 velocity of money for this economy? Round this to two digits after the decimal.
How would a doubling of velocity affect Real and Nominal GDP, assuming the money supply doesn’t change
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- Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2014, the money supply was 100, the price of a pen was $4.00, and the economy produced 500 pens. Fill in the missing values in the following table, rounding to the nearest cent when necessary. Money Supply Price Level Year (Dollars) Velocity of Money 2014 100 (Dollars) 4.00 Quantity of Output (Pens) Nominal GDP (Dollars) 500 2015 101 20 500 The money supply grew at a rate of money 2014 to 2015 was % % from 2014 to 2015. Since pen output did not change from 2014 to 2015 and the velocity of in changes in the price level. The inflation rate from ' the change in the money supply was reflectedarrow_forwardA standard "money demand" function used by macroeconomists has the form In(m) = Po + B₁In(GDP) + B₂R, Where m is the quantity of (real) money, GDP is the value of (real) gross domestic product, and R is the value of the nominal interest rate measured in percent per year. Supposed that B₁ = 2.32 and B₂ = -0.02. What is the expected change in m if GDP increases by 9%? The value of m is expected to by approximately %. (Round your response to the nearest integer)arrow_forward(b) Assume that a country’s nominal GDP was measured at $1500 billion in a year and the volume of money (i.e. M1) circulating in the economy the same year was $400 billion. Using the equation of exchange, determine the velocity of money during the year.arrow_forward
- Define velocity of money and discuss the major determinants of velocity.arrow_forwardIf the money supply increases by 7%, the price level by 2%, and the real output by 6%, then according to the equation of the quantitative theory of money, the velocity of money increases by:arrow_forwardSuppose the velocity of money decreased from 1.5 to 1.3. Velocity of M2 2.0 1.9 1.8 1.7 1.6 1.5 1960 Recession % Average 1965 1970 1975 1980 Ratio of GDP to M2 1985 M 1990 YEAR 1995 By what percent would M have to increase in order to fully offset this decrease in V? Instructions: Enter your response as a percentage rounded to one decimal place. 2000 2005 2010 2015 2020arrow_forward
- A standard "money demand" function used by macroeconomists has the form In(m)=Bo+B₁In(GDP) + B₂R, Where m is the quantity of (real) money, GDP is the value of (real) gross domestic product, and R is the value of the nominal interest rate measured in percent per year. Supposed that B₁ = 1.51 and ₂ = -0.07. What is the expected change in m if GDP increases by 6%? The value of m is expected to (Round your respon by approximately %. ger) increase decreasearrow_forwardAssume GDP is currently $10,850 billion per year and the quantity of money is $833 billion. What is the velocity of money?arrow_forwardDo not type in dollar signs or round any of your answers. In year one, the money supply (M) is equal to 500, the velocity of money (V) is 5, and the price level is 1.0. According to the equation of exchange, in year 1, nominal and real GDP are both equal to In year 2, the money supply is increased to 530.4 and velocity is unchanged. If the economy grew at the rate of 4 percent, real GDP in year 2 is equal to while nominal GDP in year 2 is equal to As a result of the Fed's decision to increase the money supply from 500 to 530.4, the price level rose from 1.0 to indicating that the inflation rate was percent.arrow_forward
- If velocity (V) and aggregate output (Y) remain constant at $4 and $1,250 billion, respectively, what happens to the price level (P) if the money supply (M) declines from $500 billion to $400 billion? Originally, the price level is (Round your response to two decimal places.)arrow_forwardYou are the new Governor of State Bank of Pakistan after Reza Baqir. For each of the situations listed below, decide if you would use Easy-Monetary policy or Tight-Monetary policy. (150 words.) Scenarios: RGDP dropped from 3 percent to 1 percent in the last year. The CPI and GDP deflator have risen 3 percent in the last six months. Commercial interest rates are rising, but the SBP has not raised rates. RGDP is growing steadily, and prices are rising sharply. The Pakistan is experiencing both high inflation and high unemployment. We are in a recession. Factory orders are down, and the economy appears to be slumping. Unemployment is low and prices are rising steadily. Unemployment rates are pushing 11 percent while the CPI has fallen from 8 percent to 2 percent growth. We are in a recession but are experiencing high inflation. The money supply appears to be tight, and prices are on the rise.arrow_forwardConsider a simple economy that produces only pies. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2018, the money supply was $360, the price of a pie was $9.00, and the economy produced 800 pies. NOTE: for YEAR 2019, Price Level (Dollars), the choices are (0.47 OR 9.00 OR 9.45 OR 0.50) nominal GDP options for YEAR 2018 are (85.00 OR 7,560.00 OR 7,200.00 OR 89.00) nominal GDP options for YEAR 2019 are (89.00 OR 85.00 OR 7,560.00 OR 7,200.00 ) NOTE: The money supply grew at a rate of _________ (2.44% OR 1.13% OR 5% OR 105%) from 2018 to 2019. Since pie output did not change from 2018 to 2019 and the velocity of money _______ (increased OR decreased OR remained the same), the change in the money supply was reflected ________ (partially OR entirely) in changes in the price level. The inflation rate from 2018 to 2019 was ________ (5% OR 2.44% OR 105% OR 1.13%)arrow_forward
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