Chapter 1. Chapter 13a (24a)

Step 1

Solved Problems

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You must read each slide, and complete any questions on the slide, in sequence.

Question

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The amount of money spent must equal the value of transactions. P × Q is equal to nominal GDP — the aggregate price level times the level of output. This must be matched by the money stock times the velocity, or the number of times that each dollar is spent.

Step 2

Question

Consider the quantity theory of money. If the money supply is $20,000, the price level is 120, and the real GDP is $1,000, how much is velocity? jLKTkSuHntc=

If M × V = P × Q, then V = (P × Q) / M. Here, V = (120 × $1,000) / $20,000.

Step 3

Question

Consider the quantity theory of money. The money supply is $20,000, the price level is 120, the real GDP is $1,000, and the velocity is 6. Now assume that the money supply increases to $25,000. If prices are fixed, what must the new output level (Q) be? $Z2gcXZchIkuv37y2ynLLng==

If M × V = P × Q, then Q = (M × V) / P. In this case, Q = ($25,000 × 6) / $120. Here, an increase in the money supply increases output, all else equal.

Step 4

Question

Consider the quantity theory of money. The money supply is $20,000, the price level is 120, the real GDP is $1,000, and the velocity is 6. If the money supply increases to $25,000, the velocity is the same as calculated above, and output is fixed at $1,000, what must the new price level be? $f0AZUTFBZnU=

If M × V = P × Q, then P = (M × V) / Q. In this case, P = ($25,000 × 6) / $1,000 = $150. Here, an increase in the money supply increases inflation, all else equal.