05 Jun Question 1. The money supply M has been growing at 1
Question
1. The money supply M has been growing at 10% per year, and nominal GDP PY has been growing at 20% per year. The data are as follows (in billions of dollars):
2007
2008
2009
M
100
110
121
PY
1000
1200
1440
Calculate the velocity in each year. At what rate is velocity growing?
2. Calculate what happens to nominal GDP if velocity remains constant at 5 and the money supply increases from $200 billion to $300 billion.
3.What happens to nominal GDP if the money supply grows by 20% but velocity declines by 30%?
4.If credit cards were made illegal by government legislation, what would happen to velocity? Explain your answer.
5. If velocity and aggregate output are reasonably constant (as the classical economists believed), what happens to the price level when the money supply increases from $1 trillion to $4 trillion?
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