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Inflation: Its Causes, Effects, and Social Costs Graded Assignment l Read Chapte

ID: 1219177 • Letter: I

Question

Inflation: Its Causes, Effects, and Social Costs Graded Assignment l Read Chapter 5 Back to Assignment Due Tuesday 06.14.16 at 11:45 PM Do No Harm 10 Attempts 1. velocity and the quantity equation Aa Aa Consider a simple economy that produces only fritters. 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 $200, the price of a fritter was $5.00, and the economy produced 400 fritters. Fill in the table, and use it to answer the following questions. 2011 2012 Quantity of Money $200 $216 Velocity of Money 10 Price Level $5.00 Quantity of output 400 400 In 2011, nominal GDP was whereas in 2012, nominal GDP was The money supply grew at a rate of from 2011 to 2012 Since fritter output did not change from 2011 to 2012 and the velocity of money the change in the money supply was reflected 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 kY In 2012, real money balances were This implies that people want to hold of every dollar of income in the form of money. ONA 3.16 2004-2016 Aplia. All rights reserved Grade it Now Save & Continue o 2013 Cengage Learning except as noted. All rights reserved.

Explanation / Answer

1. According to the quantity equation,

M*V = P*Y

In 2011,

200 * V = 5 * 400

V = 2000/200

V = 10.

in 2012,

216 * 10 = P * 400.

2160/400 = P

P = $5.4

2. The nominal GDP = P * Y.

In 2011, NGDP = 5 * 400 = $2000.

In 2012, NGDP = 5.4*400 = $2160.

3. Growth rate of money supply = (MS in 2012 - MS in 2011)(/MS in 2011)*100.

Growth rate = (216 - 200)/200*100

G.R = 16/200*100

G.R = 8%.

4. Unchanged.

As computed in part 1 above, V = 10, thus the velocity remained unchanged.

5. Only.

Only the money supply increased in the economy.

6. Inflation is the rapid change of price.

Inflation = (P of 2012 - P of 2011)/P of 2011*100

Inflation = 5.4 - 5/5 *100

Inflation = 8%.