Name: Trần Xuân Đức
ID: 11191133
Class: E-SOM 2
Exercise 1:
a. The nominal GDP = P x Y = 10000 dollars, the real GDP (Y) is
5000 dollars, so we can calculate the price level–
P = ( P x Y / Y ) = ( 10000 / 5000 ) = 2.
Now we can calculate the velocity of money. If we know that M x V =
P x Y,
V = ( P x Y / M ) = 10000 / 500 = 20.
b. If velocity V and the money supply M are constant, and the
economy’s output rises by 5%, then P must fall by 5%, so the equation
M x V = P x Y could be correct.
c. If it wants to keep the price level stable, FED must increase the
money supply by 5%, because of the real GDP increase.
d. If FED wants the inflation of 10% for next year, it will need to
increase the money supply by 15%. The price level is 10% higher and
real GDP 10% higher, so M x V will also raise by 15%.
Exercise 2:
a. If bank regulations expend the availability of credit cards people
will need less cash and will decrease the demand for money.
b. We would have a higher supply of money than demand which will
cause inflation- increase in prices.
c. If FED wants to keep the price level stable, he should decrease the
supply of money ad to put it in correlation with the demand for
money.
Exercise 3:
If we imagine that the velocity of money is constant and FED is trying
to achieve zero inflation, this doesn’t require the rate of growth to be
zero. This rate should follow the moving in real GDP and that should
have zero inflation as a result.
Exercise 4:
The inflation tax on holders increases a lot when the inflation rate
increase sharply. This affects the supply of money every day.
Wealth in the savings account is not subject to a change in the
inflation tax because the nominal interest rate moves as inflation
changes. So, the nominal interest rate will also increase when inflation
raise.
The real returns are lower when the inflation is high, that’s how the
holders of accounts are also affected.
Exercise 5:
a. We can see that inflation in this scenario is 100% because both
prices increased by 100% over the year. Both Rita and Bob are
unaffected by the changes in prices because both farmers had their
