Suppose that velocity is constant. The economy's output of goods and services rises by 5% each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant? (Hint--put the variables into the formula)

Help!

,gfyuj

To determine what will happen to nominal GDP and the price level next year, we can use the equation for nominal GDP:

Nominal GDP = Price level * Real GDP

Given that the velocity of money is constant, we can assume that the equation for nominal GDP is:

Nominal GDP = Money supply * Velocity

Since the question mentions that the Fed keeps the money supply constant, we can assume the money supply remains the same.

To calculate the change in nominal GDP, we need to consider the growth rate of the economy's output of goods and services, which is stated to be 5% per year. We can express this as a multiplier of 1.05.

Next, if the price level is expected to change, we can represent it as a multiplier of P1 (next year's price level).

Now we can set up the equation:

Nominal GDP(next year) = Money supply * Velocity(next year)

Since the money supply and velocity are constant, we have:

Nominal GDP(next year) = Money supply * Velocity = Nominal GDP(current year)

However, we know that the economy's output of goods and services is expected to rise by 5% next year, which means that Real GDP will increase by 5%. We can express this as a multiplier of 1.05:

Real GDP(next year) = Real GDP(current year) * 1.05

To find the next year's price level (P1), we can rearrange the equation:

Nominal GDP(next year) = P1 * Real GDP(next year)

Substituting the expressions we derived earlier:

Nominal GDP(next year) = Money supply * Velocity = Nominal GDP(current year)

P1 * Real GDP(next year) = Nominal GDP(next year)

P1 * (Real GDP(current year) * 1.05) = Nominal GDP(current year)

Simplifying the equation:

P1 = (Nominal GDP(current year) / Real GDP(current year)) * 1.05

In summary, to determine what will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant, you can use the formula:

P1 = (Nominal GDP(current year) / Real GDP(current year)) * 1.05

Plug in the values for the current year's nominal GDP and real GDP, and calculate the result to find the expected price level for next year.

The formula is MV=PQ, where PQ is the price level time output of goods and services. PQ is nominal GNP. So if M is fixed and V is fixed and Q is 5% higher, what must happen to P.

That is MV = PQ = (zP)*)*(1.05*Q) -- solve for z