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(Solved): The nominal GDP of Transforta nation is $10 trillion, and its real GDP is $5 trillion this year. Gi ...
The nominal GDP of Transforta nation is trillion, and its real GDP is trillion this year. Given that condition, Transforta's central bank set the money supply at billion. a) What are the price level and the velocity of money in Transforta? b) Suppose that velocity is constant and the economy's output of goods and services rises by 10 percent each year. i. What would nominal GDP and price level be if there were no changes in the money supply? ii. What money supply should the Central Bank set next year if it wants to keep the price level stable? iii. What money supply should the Central Bank set next year if it wants inflation of 5 percent? c) Show the adjustment process of all scenarios from point b in a money supply and money demand diagram. Explain your answer
Expert Answer
a) Given the money supply (M) of $400 billion, and assuming a velocity of money (V) of 10, we can calculate the price level (P) as follows:P = (M * V) / YP = ($400 billion * 10) / $5 trillionP = 0.8Therefore, the price level in Transforta is 0.8.