Question 4 Chapter 17 Velocity and the quantity equation
4. Velocity and the quantity equation
Consider a simple economy that produces only pens. The
... [Show More] following table contains information on the
economy's money supply, velocity of money, price level, and output. For example, in 2012, the money
supply was $280, the price of a pen was $7.00, and the economy produced 600 pens.
Fill in the missing values in the following table, rounding to the nearest cent when necessary.
Quantity of
Money Velocity of
Price
Level
Quantity of
Output Nominal GDP
Year (Dollars) Money (Dollars) (Pens) (Dollars)
2013 294 15
Explanation:
600
Points: 1 / 1
Close Explanation
Recall that the value of nominal GDP equals the price of output ( ) times the quantity of output ( ).
In this case, nominal GDP in 2012 equals .
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 be the velocity of money, be the price level, be the
quantity of output (real GDP), and be the quantity of money. Recall that nominal output is the
value of current output measured with current prices, or .
Therefore, you should have entered 15 for the velocity of money in 2012.
Notice that the value of nominal GDP is $4,200 in 2012. In order for people to buy $4,200 worth of
pens with a quantity of money equal to only $280, each unit of currency must have turned over, on
4,410.00
2012 280 15 7.00 600
7.35
5%
entirely 5%
The money supply grew at a rate of
2012 to 2013 and the velocity of money
from 2012 to 2013. Since pen output did not change from
, the change in the money supply was
reflected in changes in the price level. The inflation rate from 2012 to 2013 was .
Points: 0.75 / 1
Explanation: Close Explanation
To compute the percentage change in the quantity of money ( ), use the following equation:
Recall the quantity equation:
If the quantity of money ( ) increases and the velocity of money ( ) and the quantity of output ( )
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 2012 to 2013, use the following equation:
average, 15 times per year.
Rearrange the quantity equation to solve for the price level ( ) in 2013:
Therefore, you should have entered $7.35 for the price level in 2013.
In 2013, nominal GDP equals .
remained the same
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. [Show Less]