Velocity in the country of Nemedia is always stable.In 2014,the money supply was $100 billion and real GDP was $300 billion.In 2015,the money supply increased by 10 percent,real GDP increased by 5 percent,and nominal GDP equalled $660 billion.By how much did the price level increase between 2014 and 2015?
A) 2.38 percent
B) 4.76 percent
C) 9.50 percent
D) 10.0 percent

Question

Quizplus · Accepted Answer

The velocity of money is stable, so we use the equation MV = PY. In 2014, M = $100 billion, Y = $300 billion, so P = 1.33. In 2015, M = $110 billion, Y = $315 billion, and nominal GDP (PY) = $660 billion, so P = 2.095. The price level increase is (2.095 - 1.33) / 1.33 = 0.576 or 4.76 percent.

Velocity in the Country of Nemedia Is Always Stable