Suppose the government has a goal of achieving a 3% annual increase in real GDP. The economy
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Question:
Suppose the government has a goal of achieving a 3% annual increase in real GDP. The economy is currently in equilibrium, with real GDP of $20 trillion, and the price level is 100. The velocity of money is constant at 2, and the money supply is $10 trillion.
a) What is the current level of nominal GDP and the velocity of circulation?
b) If the government wants to achieve its goal of a 3% annual increase in real GDP, what is the required growth rate of the money supply?
c) If the money supply grows at the required rate, what will be the new price level after 5 years, assuming the velocity of circulation remains constant?
d) If the velocity of circulation increases to 2.2 after 5 years, what will be the new price level?
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