1. According to the quantity equation, suppose the money supply is $600, real output is 1,000...

   

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1. According to the quantity equation, suppose the money supply is $600, real output is 1,000 units, and the GDP deflator is $3. a) What is the numerical value of velocity? b) Suppose the value of the velocity remains unchanged, how would the GDP deflator change if the central bank reduces the money supply to $300? c) Explain the notion of classical dichotomy. How is it related to your answer in part b)? d) Suppose the money supply at the beginning of this problem refers to M1. What is the numerical value of M2 velocity if the M2 money supply were $1,000. (Note: assume that all other values were as stated at the beginning of the problem.) 1. According to the quantity equation, suppose the money supply is $600, real output is 1,000 units, and the GDP deflator is $3. a) What is the numerical value of velocity? b) Suppose the value of the velocity remains unchanged, how would the GDP deflator change if the central bank reduces the money supply to $300? c) Explain the notion of classical dichotomy. How is it related to your answer in part b)? d) Suppose the money supply at the beginning of this problem refers to M1. What is the numerical value of M2 velocity if the M2 money supply were $1,000. (Note: assume that all other values were as stated at the beginning of the problem.)

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Lets break down each part of the problem a The quantity equation is given by M V P Y where M is the ... View the full answer