Suppose that this year’s money supply is $500 billion, NGDP is $10 trillion and
RGDP 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% 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%?
RGDP 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% 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%?