Consider a simple economy that produces only croquettes. The following table con
ID: 1218346 • Letter: C
Question
Consider a simple economy that produces only croquettes. The following table contains Information on the economy's output, money supply, velocity of money, and price level. For example, In 2011, the money supply was $400, the price of a croquette was $10.00, and the economy produced 800 croquettes. Fill in the table, and use It to answer the following questions. In 2011, nominal GDP was, whereas In 2012, nominal GOP was The money supply grew at a rate of from 2011 to 2012. Since croquette output did not change from 2011 to 2012 and the velocity of money, the change in the money supply was reflected partially In changes In the price level. The inflation rate from 2011 to 2012 was Assume the money demand function for this economy Is a function of income (Y) and a constant (k) in the following way: Demand for Money = kYExplanation / Answer
Velocity = GDP/money supply
In 2011 GDP = 800* 10 = $8000
Velocity in 2011 = 8000/400 = 20
Similarly in 2012 :-
Velocity = GDP/money supply
20=GDP/408
GDP=408*20 = $8160
So the price level is 8160/800=10.2
In 2011 nominal GDP was $8000 , whereas in 2012 , nominal GDP was $8160.
The money supply grew at a rate of 8/400 from 2011 to 2012, Since croquette output did not change from 2011 to 2012 the velocity of money remained constant. The change in the money supply was reflected partially in the changes in the price level. The inflation rate from 2011 to 2012 was 0.2%
In 2011 the real money balances were $8000. This implies that people want to hold k of every dollar of income in the form of money.