Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 33

Your dormitory Griffingate has appointed you central banker of its economy, which deals in the currency of wizcoins. Assume that the velocity of wizcoins in Griffingate is constant at 10,000 transactions per year. Right now real GDP is 1,000 wizcoins, and there are 2,000 wizcoins in existence.
a. What will be the value of each of the variables that make up the quantity equation- M, V, and P?
b. Now indicate how the other variables will respond to each of the following scenarios, taking each case separately and assuming that velocity remains constant.
(i) Real GDP: You increase the money supply to 4,000, and prices increase twofold.
(ii) Price level: Start with the initial values. Real GDP drops to 500 wizcoins, and the money supply remains constant.
(iii) Real GDP: Start with the initial values. Prices increase threefold because of a sudden scarcity of soda, and you decide to keep the supply of wizcoins constant.
(iv) Real GDP: Start with the initial values. You increase the money supply to 5,000 wizcoins, and prices rise by 350 percent.