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Tutorial Chapter 30
Question 1
a)
Nominal GDP = P x Y = €10,000 and Y = real GDP = €5,000, so
P = (P x Y)/Y = €10,000/€5,000 = 2.
Since M x V = P x Y, then
V = (P x Y)/M = €10,000/€500 = 20.
b)
If M and V are unchanged and Y rises by 5 percent, then since M x V = P x Y,
P must fall by 5 per cent. As a result, nominal GDP is unchanged.
c)
To keep the price level stable, the central bank must increase the money
supply by 5 per cent, matching the increase in real GDP. Then, since velocity
is unchanged, the price level will be stable.
d)
If the central bank wants inflation to be 10 per cent, it will need to increase the
money supply 15 per cent. Thus M x V will rise 15 per cent, causing P x Y to
rise 15 per cent, with a 10 per cent increase in prices and a 5 per cent rise in
real GDP.
Question 2
a.) When the price of both goods doubles in a year, inflation is 100%. Let’s set the
market basket equal to one unit of each good. The cost of the market basket is
initially $4 and becomes $8 in the second year. Thus, the rate of inflation is
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 Spring '11
 sam

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