Answer to Question #277130 in Macroeconomics for Tenn

Question

Suppose we observed an economy in which changes in the money supply produce no changes whatever in nominal GDP. What could we conclude about velocity?

8. Suppose price levels were falling 10% per day. How would this affect the demand for money? How would it affect velocity? What can you conclude about the role of velocity during periods of rapid price change?

9. Suppose investment increases and the money supply does not change. Use the model of aggregate demand and aggregate supply to predict the impact of such an increase on nominal GDP. Now what happens in terms of the variables in the equation of exchange?

Answer 1

7. The measurement of the rate at which cash flow is an exchange in an economy is defined as the velocity which is typically higher in expanding economies and in contracting economies of a given country. Therefore the if the economy in which money supply is equivalent to gross domestic product, then it means the country is a contracting economy.

8. The falling of price level happens in a deflated economy where the demand for money will be low, therefore the money will be withheld or people tend to hold money awaiting inflation thus a contracting velocity is realized. In a rapidly changing price economy, the velocity is to assist the economist and investors to estimate the stability and health of an economy, especially where it's associated with contraction velocity.

9. The impact increase of investment with on changes in money supply using aggregate demand and aggregate supply model curves on nominal GDP depict prices levels ( P) and output (Q) through which aggregate demand and aggregate supply intersects ( equilibrium) as illustrated in the figure below.