PRINCIPLES OF MACROECONOMICS-CONNECT ACC
7th Edition
ISBN: 9781264088485
Author: Frank
Publisher: MCG
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Question
Chapter 10, Problem 7P
(a)
To determine
Determine the velocity for M1 and M2.
(b)
To determine
Identify that the quantity equation holds for both M1 and M2.
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Students have asked these similar questions
Suppose 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:
Answer
The quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is
equal to the product of the price level (P) and real GDP (Q): Mx V = PxQ. Observe that when the left-hand side of the quantity equation,
Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage:
Percentage Change in (Mx V) =
=
You can use the rule that the percentage change in the product of two variables is approximately equal to the sum of the percentage changes in each
of the variables (as long as the percentage changes are fairly small) to further analyze changes in the variables of the quantity equation. In the
following equation, let "%A" stand for "percentage change in":
%AM+%AV =
=
Percentage Change in (PxQ)
%AP+%AQ
For example, if you know that the money supply grows at a rate of 8% per year, velocity grows at a rate of 1% per year, and real GDP grows at a rate
of 5% per year, you can use this…
The quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is
equal to the product of the price level (P) and real GDP (Q): Mx V = P x Q. Observe that when the left-hand side of the quantity equation,
Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage:
Percentage Change in (M x V) = Percentage Change in (PxQ)
You can use the rule that the percentage change in the product of two variables is approximately equal to the sum of the percentage changes in each
of the variables (as long as the percentage changes are fairly small) to further analyze changes in the variables of the quantity equation. In the
following equation, let "%A" stand for "percentage change in":
%AM+%AV = %AP+%AQ
For example, if you know that the money supply grows at a rate of 8% per year, velocity grows at a rate of 1% per year, and real GDP grows at a rate.
of 5% per year, you can use this…
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS-CONNECT ACC
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Similar questions
- Consider again the economy with a total money supply of $2 million and nominal GDP of $6 million. In this economy, the money supply is growing at a rate of 3 percent per year, prices are falling at a rate of 1 percent, and velocity is constant. This economy's real output is growing at a rate of _________ percent. (Enter your answer "as a percent, but without a percentage sign." In other words, if you think output is growing at a rate of 99.99%, enter only 99.99 in the blank. Use a positive sign to indicate an increase and a negative sign to indicate a decrease.)arrow_forwardSuppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year? e) What money supply should the Fed set next year if it wants to keep the price level stable? 1) What money supply should the Fed set next year if it wants the inflation rate to be 8 percent?arrow_forwardIf the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is constant, what will the inflation rate be? 4%. (Enter your response as an integer value.) If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is growing at 2 percent per year instead of remaining constant, what will the inflation rate be? %. (Enter your response as an integer value.)arrow_forward
- 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.arrow_forwardAssume that a country's money velocity remains constant and that the rate of money growth is 4%. A) What is the rate of spending growth? B) If money growth increases by 1.5 percentage points and consumption growth increases by 0.5 percentage points, what is the new rate of spending growth? C) Given your answer in Part B, what is the long-run rate of real GDP growth at an inflation rate of 4%?arrow_forwardConsider again the economy with a total money supply of $2 million and nominal GDP of $6 million. In this economy, the money supply is growing at a rate of 3 percent per year, prices are falling at a rate of 1 percent, and velocity is constant. This economy's real output is growing at a rate of _________ percent.arrow_forward
- Question 41 6. Table 6-1 contains historical data for nominal GDP, M1, and M2. 6.1 Use this data to compute V1, velocity based on M1; and V2, velocity based on M2. Be sure to round your answers for velocity to two decimal places. Note that Nominal GDP indicates PY in the quantity theory of money. Table 6-1. GDP, Money, and Velocity Year Nominal GDP ($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 V2arrow_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_forwardIn July 2013, M1 was $2,539 billion; M2 was $10,710 billion; check-able deposits owned by individuals and businesses were $1,414 billion; small time deposits were $556 billion; and money market funds and other deposits were $665 billion. Calculate currency held by individuals and businesses and traveler's check in July 2013, and calculate savings deposits. In July 2013, currency held by individuals and businesses and traveler's checks were $ _____ billion. Savings deposits in July 2013 were $_____ billion.arrow_forward
- Consider an economy with real output of 400 and an average price level of $2. While velocity and the price level are constant, this economy's real output is increasing by 1.25 percent per year. If the average dollar in this economy is spent 10 times over a year, calculate this economy's money supply, carefully following all numeric instructions. We'll reuse this information in the next question.arrow_forwardAccording to your graph, the equilibrium value of money is (0.25, 0.50, 0.75, 1.00) therefore the equilibrium price level is (1.00, 1.33, 2.00, 4.00). Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion. In order to reduce the money supply, the Fed can use open market operations to (sell bonds to – buy bonds from) the public. Use the purple line (diamond symbol) to plot the new money supply (MS2). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is (greater – less) than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will (increase – reduce) people’s demand for goods and services. In the long run, since the economy’s ability to produce goods and services has not changed, the prices of goods and services will (rise – fall) and value of money will (rise – fall)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
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