Consider a simple economy that produces only latkes. The following table contain
ID: 1222775 • Letter: C
Question
Consider a simple economy that produces only latkes. The following table contains information on the economy's output, money supply, velocity of money, and price level. For example, in 2012, the money supply was $160, the price of a latke was $8.00, and the economy produced 200 latkes. Fill in the table, and use it to answer the following questions. In 2012, nominal GDP was, where as in 2013, nominal GDP was. The money supply grew at a rate of from 2012 to 2013. Since latke output did not change from 2012 to 2013 and the velocity of money_____, the change in the money supply was reflected____in changes in the price level. The inflation rate from 2012 to 2013 was .Explanation / Answer
The equation of exchange is given as :
M*V = P*Y
where M = money supply
V = velocity of money
P = price level
Y = quantity of output.
For 2012, 160*V = 8*200
V = 1600/160
V = 10.
For 2013,
164*10 = P*200
P = 1640/200
P = $8.20
Nominal GDP = price * output
For 2012,
Nominal GDP = 8*200 = $1600.
For 2013, nominal GDP = 8.2*200 = $1640.
Growth of money supply = [(M in 2013 - M in 2012)/M in 2012]*100.
Growth of moeny supply = 164-160/160*100
Growth of money supply = 2.5%.
Velocity is also the same in both the years.
The increased money supply in the economy, increased the price level in the economy.
Inflation = P in 2013 - P in 2012/P in 2012*100
Inflation = 8 - 8.2/8*100
Inflation = 2.5%.