Quizzol

QUESTION:

Consider a simple economy that produces only jean jackets. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2020, the money supply was $400, the price of a jean jacket was $7.50, and the economy produced 800 jean jackets.

Fill in the missing values in the following table, selecting the answers closest to the values you calculate.

Year	Quantity of Money	Velocity of Money	Price Level	Quantity of Output	Nominal GDP
Year	(Dollars)	Velocity of Money	(Dollars)	(Jean jackets)	(Dollars)
2020	400		7.50	800
2021	408	15		800

The money supply grew at a rate of from 2020 to 2021. Since jean jacket output did not change from 2020 to 2021 and the velocity of money , the change in the money supply was reflected in changes in the price level. The inflation rate from 2020 to 2021 was .

ANSWER:

Fill in the missing values in the following table, selecting the answers closest to the values you calculate.

Year	Quantity of Money	Velocity of Money	Price Level	Quantity of Output	Nominal GDP
Year	(Dollars)	Velocity of Money	(Dollars)	(Jean jackets)	(Dollars)
2020	400	15	7.50	800	6,000.00
2021	408	15	7.65	800	6,120.00

Points:

1 / 1

Recall that the value of nominal GDP equals the price of output (

P

) times the quantity of output (

Y

). In this case, nominal GDP in 2020 equals

800 jean jackets \times $7.50 per jean jacket = $6,000

The velocity of money measures the number of times the typical unit of currency is used to pay for newly produced goods or services. To calculate the velocity of money, divide the value of output (nominal GDP) by the quantity of money. Let

V

be the velocity of money,

P

be the price level,

Y

be the quantity of output (real GDP), and

M

be the quantity of money. Recall that nominal output is the value of current output measured with current prices, or

P \times Y

$V$	$=$	$\frac{P \times Y}{M}$
	$=$	$\frac{$7.50 \times 800}{$400}$
	$=$	$15$

Therefore, you should have entered 15 for the velocity of money in 2020.

Notice that the value of nominal GDP is $6,000 in 2020. In order for people to buy $6,000 worth of jean jackets with a quantity of money equal to only $400, each unit of currency must have turned over, on average, 15 times per year.

Rearrange the quantity equation to solve for the price level (

P

) in 2021:

$P$	$=$	$\frac{M \times V}{Y}$
	$=$	$\frac{$408 \times 15}{800}$
	$=$	$$7.65$

Therefore, you should have entered $7.65 for the price level in 2021.

In 2021, nominal GDP equals

800 jean jackets \times $7.65 per jean jacket = $6,120

The money supply grew at a rate of2% Correct

from 2020 to 2021. Since jean jacket output did not change from 2020 to 2021 and the velocity of moneyremained the same Correct

, the change in the money supply was reflectedentirely Correct

in changes in the price level. The inflation rate from 2020 to 2021 was2% Correct

Points:

1 / 1

To compute the percentage change in the quantity of money (

M

), use the following equation:

$Percent Change in M$	$=$	$\frac{100 \times ($408 - $400)}{$400}$
	$=$	$2%$

Recall the quantity equation:

M \times V

=

P \times Q

If the quantity of money (

M

) increases and the velocity of money (

V

) and the quantity of output (

Y

) remain the same, the increase in the quantity of money will be reflected entirely in a rising price level.

To compute the percentage change in the price level from 2020 to 2021, use the following equation:

$Percent Change in P$	$=$	$\frac{100 \times ($7.65 - $7.50)}{$7.50}$
	$=$	$2%$

This illustrates the quantity theory of money. Specifically, if the velocity of money and real output are constant, changes in the money supply cause proportionate changes in the price level.

Posted by Cleveland on September 10, 2024