The following problem requires a basic knowledge about probabilities and the calculation of expected values. In addition, the problem is more easily solved using Excel spreadsheet software.
a. Calculate the dollar amount of the money supply under each scenario or outcome.
b. Calculate the expected value of the money supply, taking into consideration each scenario and its probability of occurrence.
c. Scenario C is the most likely scenario given that its probability of occurrence is 40 percent. Show how the amount of the money supply would change holding real output at 500,000 units and the price level at $100 for each of the velocity of money turnover rates (you have previously calculated the money supply under Scenario C for a turnover of 3.0 times).
d. Repeat the Scenario C exercise in (c) but now hold the velocity of money at 3.0 times and price level at $1000 and allow real output to change.
e. Repeat the Scenario C exercise in (c) but now hold the velocity of money at 3.0 times and real output at 500,000 units and allow price level to change.