Question

Velocity and the quantity equation Consider a simple economy that produces only cell phones. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $360, the price of a cell phone was $4.50, and the economy produced 800 cell phones. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Table: Year; Quantity of Money ($); Velocity of Money; Price Level ($); Wuantity of Output (cell phones); Nominal GDP ($) 2017; 360; ____; 4.50; 800; _______ 2018; 378; 10; _____; 800; _______ The money supply grew at a rate of _____ from 2017 to 2018. Since cell phone output did not change from 2017 to 2018 and the velocity of money __________, the change in the money supply was reflected _______ in changes in the price level. The inflation rate from 2017 to 2018 was ________.

Answer 1

For the year 2017, the missing velocity of money is calculated to be 10, with a Nominal GDP of $3600. In 2018, given the constant velocity of money, the Nominal GDP is $3780, and the price level increases to $4.725. The money supply growth rate from 2017 to 2018 is 5%, with an inflation rate approximately the same due to constant output and velocity.

Step-by-step explanation:

The student's question revolves around using the basic quantity equation of money to fill in missing values in a given table for a simple economy. According to this equation, Money Supply × Velocity of Money = Nominal GDP = Price Level × Real GDP. To solve the student's question, we will need to perform calculations based on the data provided for the years 2017 and 2018 where only cell phones are produced, and find the velocity, price level, and nominal GDP.

To fill in the missing values for 2017, we need to calculate the Nominal GDP, which is the product of the price level and the quantity of output: $4.50 per cell phone × 800 cell phones = $3600. Using the Nominal GDP and the money supply for 2017, we can determine the velocity for that year: the Nominal GDP of $3600 divided by the money supply of $360 gives a velocity of 10. With this velocity of money, we can verify that the basic quantity equation of money holds for 2017.

For 2018, since we have the velocity of money (10) and the money supply ($378), we can calculate the Nominal GDP: $378 × 10 = $3780. To find the price level, we can use the Nominal GDP and the constant quantity of output of 800 cell phones: $3780 divided by 800 cell phones gives us a price level of $4.725.

The growth rate of the money supply from 2017 to 2018 can be calculated by the growth formula ((New Value - Original Value) / Original Value) × 100%, which is (($378 - $360) / $360) × 100% = 5%. Since the cell phone output did not change and the velocity of money is constant, the change in the money supply was reflected entirely in changes in the price level. The inflation rate from 2017 to 2018, calculated as the percentage change in the price level, is (($4.725 - $4.50) / $4.50) × 100% approximately 5%.