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Chapter 19: Q3. (page 405)

Suppose that the money supply is \(1 trillion and money velocity is 4. Then the equation of exchange would predict nominal GDP to be:

a. \)1 trillion.

b. \(4 trillion.

c. \)5 trillion.

d. $8 trillion

Short Answer

Expert verified

The correct option is (b): $4 trillion.

Step by step solution

01

Explanation

The equation of exchange is given as MV = PQ.

Here, M is money supply, V is velocity, and PQ is the nominal GDP.

Substituting M with 1 trillion and V with 4, as given in the question, the nominal GDP is obtained as follows:

PQ = 1 x 4 = 4

Hence, the nominal GDP is $4 trillion.

Money Velocity is the number of times $1 is used to purchase 1 unit of a final good, meaning a money velocity of 4 implies that every $1 spent generates $4 of exchanges as the money supply moves around the economy.

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Most popular questions from this chapter

First, imagine that both input prices and output prices are fixed in the economy. What does the aggregate supply curve look like? If AD decreases in this situation, what will happen to equilibrium output and the price level? Next, imagine that input prices are fixed, but output prices are flexible. What does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? Finally, if both input prices and output prices are fully flexible, what does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level?

An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusts back to producing at full employment, the price level will ________.

a. increase

b. decrease

c. stay the same

What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?

Assume the following information for a hypothetical economy in year 1: money supply = $400 billion; long-term annual growth of potential GDP = 3 percent; velocity = 4. Assume that the banking system initially has no excess reserves and that the reserve requirement is 10 percent. Also suppose that velocity is constant and that the economy initially is operating at its full-employment real output.

  1. What is the level of nominal GDP in year 1?

  2. Suppose the Fed adheres to a monetary rule through open-market operations. What amount of U.S. securities will it have to sell to, or buy from, banks or the public between years 1 and 2 to meet its monetary rule?

Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:

a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.

b. Downward wage inflexibility means that declines in aggregate demand can cause a long-lasting recession.

c. Changes in the money supply M increase PQ; at first only Q rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.

d. Fiscal and monetary policies smooth out the business cycle.

e. The Fed should increase the money supply at a fixed annual rate.
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