Question

CENGAGE MINDTAP

Homework (Ch 30)
Back to Assignment
Attempts
܀
4. Velocity and the quantity equation
Consider a simple economy that produces only air fryers. The following table contains information on the economy's money supply, velocity of money,
price level, and output. For example, in 2019, the money supply was $400, the price of a air fryer was $12.50, and the economy produced 800 air
fryers.
Year
2019
2020
Do No Harm/2
Fill in the missing values in the following table, selecting the answers closest to the values.you calculate.
Quantity of Money
(Dollars)
Quantity of Output
(Air fryers)
400
800
800
408
Velocity of Money
The money supply grew at a rate of
money
2019 to 2020 was
25
Price Level
(Dollars)
12.50
Nominal GDP
(Dollars)
from 2019 to 2020. Since air fryer output did not change from 2019 to 2020 and the velocity of
the change in the money supply was reflected
in changes in the price level. The inflation rate from

Answer 1

The inflation rate from 2019 to 2020 was 2%.

Step-by-step explanation:

In order to determine the inflation rate, we can use the quantity equation, which states that MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the quantity of output. Rearranging the equation to solve for the inflation rate, we get the formula:

`\[ \text{Inflation Rate} = \frac{\text{Nominal GDP}_(2020) - \text{Nominal GDP}_(2019)}{\text{Nominal GDP}_(2019)} * 100\]`

Given that the quantity of output (Y) remains constant at 800 air fryers, and the velocity of money (V) is given, we can focus on the change in the money supply and the price level.

The change in the money supply is
`\(408 - 400 = 8\)` dollars. The initial nominal GDP in 2019 is
`\(400 * 12.50 = 5000\)` dollars, and the nominal GDP in 2020 is
`\(408 * 12.50 = 5100\)` dollars.

Substituting these values into the inflation rate formula:

`\[ \text{Inflation Rate} = (5100 - 5000)/(5000) * 100 = 2\%\]`

Therefore, the inflation rate from 2019 to 2020 was 2%. This indicates that the increase in the money supply contributed to a proportional increase in the price level, resulting in a 2% inflation rate.

In summary, the inflation rate is a measure of the percentage increase in the price level over time. In this case, the 2% inflation rate signifies the impact of the change in the money supply on the economy's overall price level.

Answer 2

Growth of money supply is calculated as follows:

Money supply growth= M 2011− M 2010 M 2010×100 Money supply

growth=336−320320×100%

The inflation rate from 2010 to 2011 is calculated as: Inflation rate=

P 2011− P 2010 P 2010×100 Inflation Rate=8.4−88×100=5%

The money supply grew at a rate of 5% from 2010 to 2011. Since pie output did not change from 2010 to 2011 and the velocity of money remains the same, the change in the money supply was reflected fully in changes in the price level. The inflation rate from 2010 to 2011 was 5%.