M + V = P + Y

M : 22million

V : 4.5

P : 1.1

Y : 90mil

Using %M + %V = %P + %Y, solve the next question

1. Suppose that the velocity stays constant year to year. The output of goods and services rises by 3% each year. The central bank is increasing the money supply by 7% each year. How much will the nominal GDP and the price level increase annually as a result? (in percent change)

%M + %V = %P + %Y

(7% + 0 = 3% + %Y) = 7%-3% = 4% (Price Level Increase)

(ALREADY SOLVED, USE THIS FOR NEXT PART)

2. Assume the same growth rate in output as above. Instead of simply growing the money supply by 7% annually, the central bank's objective is now to keep the price level constant from year to year. How much should they increase the money supply annually (in percentage terms) to maintain the price level constant?